New IRS guidance fills in several more pieces of the Code Sec. 199A passthrough deduction puzzle. Taxpayers can generally rely on all of these new final and proposed rules.

New IRS guidance fills in several more pieces of the Code Sec. 199A passthrough deduction puzzle. Taxpayers can generally rely on all of these new final and proposed rules.

Final Regulations

The final regulations in T.D. 98xx_1 largely adopt the proposed regulations in NPRM REG-107892-18 (August 16, 2018), but with substantial modifications.

Taxpayers are likely to be disappointed in one thing that did not change: all items treated as capital gain or loss, including Section 1231 gains and losses, are still excluded from qualified business income (QBI). Taxpayers should continue to apply the Section 1231 netting and recapture rules when calculating the Code Sec. 199A deduction.

However, the final regulations drop the rule that treated an incidental non-specified services trade or business (SSTB) as part of an SSTB if the businesses were commonly owned and shared expenses, and the non-SSTB’s gross receipts were no more than five percent of the business’s combined gross receipts.

The final regulations make several adjustments to the proposed regulations for estates and trusts. Most significantly, the final regulations remove the definition of "principal purpose" under the anti-abuse rule that allows the IRS to aggregate multiple trusts. The IRS is taking this issue under advisement. Also, in determining if a trust or estate has taxable income that exceeds the threshold amount, distributions are no longer excluded. Instead, the entity’s taxable income is determined after taking into account any distribution deduction under Code Sec. 651 or Code Sec. 661.

The final regulations retain the presumption that an employee continues to be an employee while doing the same work for the same employer. However, the regulations provide a new three-year look back rule, and allow the worker to rebut the presumption by showing records (such as contracts or partnership agreements) that corroborate the individual’s status as a non-employee.

Other changes of note include:

• Disallowed, limited or suspended losses must be used in order from the oldest to the newest, on a FIFO (first in, first out) basis.
• A relevant passthrough entity (RPE) can aggregate businesses.
• If an RPE fails to report an item, only that item is presumed to be zero; the missing information may be reported on an amended return.
• The S portion and non-S portion of an electing small business trust (ESBT) are treated as a single trust for purposes of determining the threshold amounts.

Proposed Regs for QBI, RICs, Trusts, Estates

Taxpayers may rely on the proposed regulations in NPRM REG-134652-18, which cover three broad topics.

First, in calculating QBI, previously disallowed losses are treated as losses from a separate trade or business. If the losses relate to a publicly traded partnership (PTP), they must be treated as losses from a separate PTP. Attributes of the disallowed loss are determined in the year the loss is incurred.

Second, a RIC that receives qualified REIT dividends may pay Section 199A dividends. The IRS continues to consider permitting conduit treatment for qualified PTP income received by a RIC, and seeks public comment on this issue.

Finally, the proposed regulations also provide rules for charitable remainder unitrusts (and their beneficiaries), split-interest trusts, and separate shares.

Rental Real Estate Enterprise

The proposed revenue procedure set forth in Notice 2019-7 provides a safe harbor for a rental real estate enterprise to be treated as a trade or business for purposes of Section 199A. RPEs can also use the safe harbor.

A rental real estate enterprise must satisfy three conditions to qualify for the safe harbor:

• Separate books and records must be maintained to reflect income and expenses for each rental real estate enterprise.
• At least 250 or more hours of rental services must be performed per year with respect to the rental enterprise. For tax years beginning after December 31, 2022, this test can be satisfied in any three of the five consecutive tax years that end with the tax year.
• The taxpayer must maintain contemporaneous records of relevant items, including time reports, logs, or similar documents. (This requirement does not apply to tax years beginning in 2018.)

Relevant items include hours of all services performed, description of all services performed, dates on which such services were performed, and who performed the services.

W-2 Wages

Rev. Proc. 2019-11 allows taxpayers to use one of three methods to calculate W-2 wages for the passthrough deduction:

• the unmodified Box method;
• the modified Box 1 method; or
• the tracking wages method.

These methods were proposed in Notice 2018-64, I.R.B. 2018-35, 347. The unmodified Box method is simplest, but the other two methods are more accurate.

Comments Requested

The IRS requests comments on the proposed regulations and the proposed safe harbor. The IRS must receive the comments and any requests for public hearing within 60 days after the proposed regulations are published in the Federal Register.

The IRS has issued interim guidance on the excise tax payable by exempt organizations on remuneration in excess of $1 million and any excess parachute payments made to certain highly compensated current and former employees in the tax year. The excise tax imposed by Code Sec. 4960 is equal to the maximum corporate tax rate on income (currently 21 percent).

The IRS has issued interim guidance on the excise tax payable by exempt organizations on remuneration in excess of $1 million and any excess parachute payments made to certain highly compensated current and former employees in the tax year. The excise tax imposed by Code Sec. 4960 is equal to the maximum corporate tax rate on income (currently 21 percent).

Q&A on Section 4960

The current guidance is contained in a Question-and-Answer format. The interim guidance addresses:

• general application of Code Sec. 4960;
• applicable tax-exempt organizations and related organizations;
• covered employees;
• excess remuneration;
• medical and veterinary services;
• excess parachute payments;
• three-times-base-amount test for parachute payments;
• computation of excess parachute payments;
• reporting liability under Section 4960;
• miscellaneous issues; and
• the effective date.

Reliance

The IRS intends to issue proposed regulations under Code Sec. 4960 which will incorporate the interim guidance. Until future guidance is issued, taxpayers may rely on the rules in the interim guidance from December 22, 2017. Any future guidance will be prospective and will not apply to tax years beginning before the guidance is issued. Until additional guidance is issued, taxpayers may base their positions upon a good faith, reasonable interpretation of the statute and legislative history, where appropriate. Specifically, the positions reflected in the guidance constitute a good faith and reasonable interpretation.

Comments Requested

The IRS and Treasury Department request comments on the topics addressed in the interim guidance and any other issues arising under Code Sec. 4960. Comments should be submitted no later than April 2, 2019.

The IRS has provided safe harbors for business entities to deduct certain payments made to a charitable organization in exchange for a state or local tax (SALT) credit. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose. Proposed regulations that limit the charitable contribution deduction do not affect the deduction as a business expense.

The IRS has provided safe harbors for business entities to deduct certain payments made to a charitable organization in exchange for a state or local tax (SALT) credit. A business entity may deduct the payments as an ordinary and necessary business expenses under Code Sec. 162 if made for a business purpose. Proposed regulations that limit the charitable contribution deduction do not affect the deduction as a business expense.

Charitable Contributions and SALT Limit

An individual’s itemized deduction of SALT is limited to $10,000 ($5,000 if married filing separately). Some states and local governments have adopted or considered adopting laws that allowed individuals to receive a tax credit for contributions to funds controlled by the state and local government.

Under proposed regulations, however, an individual, estate, and trust generally must reduce the amount of any charitable contribution deduction by the amount of any SALT credit he or she receives or expects to receive for the transfer. A de minimis exception allows a taxpayer to disregard up to 15 percent of the payment or transfer to the charitable organization.

C Corporations

If a C corporation makes the charitable payment in exchange for a state and local tax credit, it may deduct the payment as an ordinary and necessary business expense to the extent of any SALT credit received or expected to receive.

Specified Pass-Through Entity

A specified pass-through entity may also deduct the payment as an ordinary and necessary business expense, but only if the SALT credit applies or is expected to apply to offset a SALT other than an income tax. A specified pass-through entity for this purpose is any business entity other than a C corporation that is regarded as separate from its owner for all federal income tax purposes (i.e., disregarded entity). The entity also must operate a trade or business within the meaning of Code Sec. 162 and be subject to SALT incurred in carrying on that trade or business that is imposed directly on the entity.

Effective Date

The safe harbors apply to any payments made to a charitable organization in exchange for a SALT credit paid on or after January 1, 2018.

The Treasury and IRS have issued final regulations for determining the inclusion under Code Sec. 965 of a U.S. shareholder of a foreign corporation with post-1986 accumulated deferred foreign income. Code Sec. 965 imposes a "transition tax" on the inclusion. The final regulations retain the basic approach and structure of the proposed regulations, with certain changes.

The Treasury and IRS have issued final regulations for determining the inclusion under Code Sec. 965 of a U.S. shareholder of a foreign corporation with post-1986 accumulated deferred foreign income. Code Sec. 965 imposes a "transition tax" on the inclusion. The final regulations retain the basic approach and structure of the proposed regulations, with certain changes.

The final regulations generally apply beginning the last tax year of the foreign corporation that begins before January 1, 2018, and with respect to a U.S. person, beginning the tax year in or with which such tax year of the foreign corporation ends.

Note: The final regulations were published without a T.D. number. According to the IRS, a T.D. number will be assigned after the IRS resumes normal operations.

Controlled Domestic Partnerships

Certain controlled domestic partnerships may be treated as foreign partnerships for determining the section 958(a) U.S. shareholders of a specified foreign corporation owned by the controlled domestic partnership and the section 958(a) stock owned by the shareholders. The definition of controlled domestic partnership is revised to not be defined only with respect to a U.S. shareholder, so that the controlled foreign partnership is clearly treated as a foreign partnership for all partners if the rule applies.

Pro Rata Share

The definitions of pro rata share and section 958(a) U.S. shareholder inclusion year are modified. The final regulations will require a section 965(a)inclusion by a section 958(a) U.S. shareholder if the specified foreign corporation, whether or not it is a CFC, ceases to be a specified foreign corporation during its inclusion year.

Downward Attribution Rule

A special rule applies when determining downward attribution from a partner to a partnership where the partner has a de minimis interest in the partnership. The threshold for applying the special attribution rule for partnerships is increased from five to 10 percent, and is extended to trusts.

Basis Election Rules

The final regulations allow a taxpayer elect to increase its basis in the stock of its deferred foreign income corporations (DFICs) by the lesser of its section 965(b) previously taxed earnings and profits or the amount it can reduce the stock basis of its E&P deficit foreign corporations without recognizing gain. Within limits, a taxpayer may designate which stock of a DFIC is increased and by how much.

Exception from Anti-Abuse Rules

The final regulations provide an exception from the anti-abuse rules for certain incorporation transactions. The rules will not apply to disregard a transfer of stock of a specified foreign corporation by U.S. shareholder of a domestic corporation, if certain requirements are met. The section 965(a) inclusion amount with respect to the transferred stock of the specified foreign corporation must not be reduced, and the aggregate foreign cash position of both the transferor and the transferee is determined as if each had held the transferred stock of the specified foreign corporation owned by the other on each of the cash measurement dates.

Cash Position

Code Sec. 965 taxes foreign earnings of a domestic corporate U.S. shareholder at a 15.5-percent rate if held in cash, but only an 8-percent rate if held otherwise. Cash includes cash and cash equivalents. The final regulations provide a narrow exception from the definition of cash position for certain commodities held by a specified foreign corporation in the ordinary course of its trade or business, as well as for certain privately negotiated contracts to buy and sell these assets.

Election and Payment Rules

Under the final regulations, the signature requirement on an election statement is satisfied if the unsigned copy is attached to a timely-filed return of the person making the election, provided that the person retains the signed original in the manner specified.

Transition rules for filing transfer agreements have also been updated. If a triggering event or acceleration event occurs on or before December 31, 2018, the transfer agreement must be filed by January 31, 2019. Rules are added to address the death of an S corporation shareholder transferor. The final regulations also include modifications to certain requirements for the terms of a transfer agreement.

The final regulations provide that in the case of an additional liability reported on a return or amended return, any amount that is prorated to an installment, the due date of which has already passed, will be due with the return reporting the additional amount. The rule on deficiencies remains the same, and payment for a deficiency prorated to an installment, the due date of which has already passed, is due on notice and demand.

Total Net Tax Liability

A taxpayer may elect to defer the payment of its total net tax liability under Code Sec. 965(h) and (i). Total net tax liability under Code Sec. 965, which defines the portion of a taxpayer’s income tax eligible for deferral, is equal to the difference between a taxpayer’s net income tax with and without the application of Code Sec. 965. The final regulations will disregard effective repatriations taxed similarly to dividends under Code Sec. 951(a)(1)(B) resulting from investments in U.S. property under Code Sec. 956 when determining net income tax liability without the application of Code Sec. 965.

Consolidated Groups

The consolidated group aggregate foreign cash position is determined under the final regulations as if all members of the consolidated group that are section 958(a) U.S. shareholders of a specified foreign corporation are a single section 958(a) U.S. shareholder.

Obsolete Guidance

The following previous guidance is obsolete:

• Notice 2018-7, I.R.B. 2018-4, 317;
• Notice 2018-13, I.R.B. 2018-6 341, Secs. 1-4, 6;
• Notice 2018-26, I.R.B. 2018-16, 480, Secs. 1-5, 7; and
• Notice 2018-78, I.R.B. 2018-42, 604, Secs. 1-3, 5.

The IRS has issued its annual revisions to the general procedures for ruling requests, technical memoranda, determination letters, and user fees, as well as areas on which the Associate Chief Counsel offices will not rule. The revised procedures are generally effective January 2, 2019.

The IRS has issued its annual revisions to the general procedures for ruling requests, technical memoranda, determination letters, and user fees, as well as areas on which the Associate Chief Counsel offices will not rule. The revised procedures are generally effective January 2, 2019.

Rev. Proc. 2019-1

This procedure explains how the IRS provides advice to taxpayers in the form of letter rulings, closing agreements, determination letters and information letters, and orally on issues under the jurisdiction of the various Associate Chief Counsel offices. It supersedes Rev. Proc. 2018-1, I.R.B. 2018-1, 1. In addition to changes made throughout the guidance, significant changes in the new procedure include:

• Sections 1, 1.01, 3.07, 5.12, 5.14, 5.15, 6.08, 9.23, 10.07, 15.11, Appendix A, Appendix B, Appendix C, Appendix D, and Appendix E have been amended to reflect the name change from "Associate Chief Counsel (Tax Exempt and Government Entities)" to "Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes)."
• Section 5.15(3) has been removed to reflect the transfer of authority to waive excise tax under Code Sec. 4980F to the Commissioner, Tax Exempt and Government Entities Division, Employee Plans Rulings and Agreements.
• Section 8.02 has been amended to remove the exception for changes in accounting methods or accounting periods from the 21-day notification rule.
  Appendix A (Schedule of User Fees) has been amended with increased user fees to match the increase in costs incurred by the IRS. The new user fee schedule is effective February 2, 2019.
• Appendix E (Church Plan Checklist) has been amended to add a new item 11 to reflect the requirement that an applicant include a representation as to whether an election under Reg. §1.410(d)-1 to apply certain provisions of the Code and the Employee Retirement Income Security Act of 1974 (ERISA) to the plan has ever been made.

Rev. Proc. 2019-2

This procedure explains when and how an Associate Office provides technical advice conveyed in a technical advice memorandum (TAM), as well as a taxpayer’s rights when a field office requests a TAM regarding a tax matter. It supersedes Rev. Proc. 2018-2, I.R.B. 2018-1, 106. Significant changes in the new procedure include:

• All references to Associate Chief Counsel (Tax Exempt and Government Entities) have been revised to read “Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes).” All references to “Appeals Policy” have been revised to read “Appeals Policy Planning Quality & Analysis.”
• Section 3.04 has been amended to delete the mandatory TAM requirement in qualified retirement plan matters in cases concerning proposed adverse letters or proposed revocation letters on collectively bargained plans.
• Section 14.02 has been amended to clarify that requests for relief under Code Sec. 7805(b) on the revocation or modification of determination letters and letter rulings issued by TE/GE are handled under the procedures in sections 23 and 29 of Rev. Proc. 2019-4, and section 12 of Rev. Proc. 2019-5.

Rev. Proc. 2019-3

This procedure provides a revised list of areas under the jurisdiction of certain Associate Chief Counsel offices for which letter rulings or determination letters will not be issued. (Lists of areas of nonissuance under the jurisdiction of the Associate Chief Counsel (International) and the Commissioner, Tax Exempt and Government Entities Division (relating to plans or plan amendments) are presented in separate revenue procedures.) It supersedes Rev. Proc. 2018-3, I.R.B. 2019-1, 130.

The following have been added to the list of issues for which advance rulings will not be issued:

• Gross Income. Whether an amount is not included in a taxpayer’s gross income under Code Sec. 61 because the taxpayer receives the amount subject to an unconditional obligation to repay the amount.
• Trade or Business Expenses. Whether a taxpayer is engaged in a trade or business. This area does not include a request for a ruling that relies on a representation from a taxpayer that the taxpayer is or is not engaged in a trade or business, or a request for a ruling that relies on factual information provided by the taxpayer evidencing the active conduct of a trade or business.
• Losses; Carryovers in Certain Corporate Acquisitions; Regulations. In determining whether a loss for worthless securities is subject to Code Sec. 165(g)(3), (i) whether the source of any gross receipts may be determined by reference to the source of gross receipts of a counter party to an intercompany transaction, as defined in Reg. §1.1502-13(b)(1) (e.g., an intercompany distribution to which Reg. §1.1502-13(f)(2) applies), other than an intercompany transaction to which Code Sec. 381(a) applies, and (ii) in an intercompany transaction to which Code Sec. 381(a) applies, whether the acquiring corporation takes into account historic gross receipts of the distributor or transferor corporation, if the intercompany transaction is part of a plan to claim a deduction for worthless securities under Code Sec. 165(g)(3).
• Treatment of multiple trusts. Whether two or more trusts shall be treated as one trust for purposes of subchapter J of chapter 1.
• Returns Relating to the Cancellation of Indebtedness by Certain Entities. Requests for a ruling that the creditor is not required to report a discharge that include as grounds for the request a dispute regarding the underlying liability.

The following issues have been modified:

• Special Rules for Exchanges Between Related Persons. Except in the case of (i) a transaction involving an exchange of undivided interests in different properties that results in each taxpayer holding either the entire interest in a single property or a larger undivided interest in any of the properties or (ii) a disposition of property in a nonrecognition transaction in which the taxpayer or the related party receives no cash or other property that results in gain recognition, whether a Code Sec. 1031(f) exchange involving related parties, or a subsequent disposition of property involved in the exchange, has as one of its principal purposes the avoidance of federal income tax, or is part of a transaction (or series of transactions) structured to avoid the purposes of Code Sec. 1031(f).

Rev. Proc. 2019-4

This procedure explains how the IRS provides advice to taxpayers on issues under the jurisdiction of the Commissioner, Tax Exempt and Government Entities Division (TE/GE) Employee Plans Rulings and Agreements Office, and details the types of advice available to taxpayers, and the manner in which the advice is requested and provided. The new procedure supersedes Rev. Proc. 2018-4, I.R.B. 2018-1, 146. In addition to minor non-substantive changes, the following changes are made:

• Modifications to reflect Employee Plans Rulings and Agreement’s current practice of considering voluntary requests for closing agreements to resolve certain income or excise tax issues that are ineligible for resolution under the Employee Plans Compliance Resolution System (EPCRS).
• Letter ruling requests may not be submitted via facsimile transmission.
• A new category called "Other Circumstances" for which determination letters can be requested has been added.
• Code Secs. 414(b), (c) and (m) have been added to the list of sections for which a determination is not made when a determination letter is issued in accordance with the revenue procedure.
• For a plan to be reviewed for, and a determination letter relied upon with respect to, whether the terms of the plan satisfy one of the design-based safe harbors, the plan document must provide a definition of compensation that satisfies Reg. §1.414(s)-1(c).
• Employee Plans Rulings and Agreements will consider a request for an extension of time for making an election under Reg. §301.9100-3 to recharacterize annual contributions made to a Roth IRA. Employee Plans Rulings and Agreements will also consider recharacterization requests that relate to a conversion or rollover contribution to a Roth IRA but only if the rollover or conversion was made prior to January 1, 2018.
• SB/SE Exam will be notified if a request for an extension of time for making an election or other application for relief under Reg. §301.9100-3 is submitted when the return is under examination.
• Beginning April 1, 2019, VCP submissions and the applicable user fees must be made using www.pay.gov. Further, the payment of user fees for pre-approved plan submissions and letter ruling requests may not be made using www.pay.gov and such requests must still be accompanied by a check in the amount of the applicable user fee.
• Clarification has been provided regarding which forms must be submitted for VCP submissions made prior to April 1, 2019.
• User fee for Form 5310 will increase from $2,300 to $3,000 for submissions postmarked on or after July 1, 2019.

Rev. Proc. 2019-5

This procedure updates the procedures for organizations applying for, and the issuing of determination letters on, exempt status under Code Secs. 501and 521. These apply to exempt organizations other than those relating to pension, profit-sharing, stock bonus, annuity, and employee stock ownership plans. The procedures also apply to revocation or modification of determination letters. In addition, the procedure provides guidance on the exhaustion of administrative remedies for declaratory judgment under Code Sec. 7428. Finally, new procedure provides guidance on applicable user fees for requesting determination letters. The new procedure supersedes Rev. Proc. 2018-5, I.R.B. 2018-1, 233. Notable changes include:

• "Tax Exempt and Government Entities" was changed to "Employee Benefits, Exempt Organizations, and Employment Taxes" throughout the document to reflect the office’s name change.
• Section 2.02 was amended to add (6), which discusses Rev. Proc. 2018-15, I.R.B. 2018-9, 379.
• Section 2.03(1) was amended to clarify that a Code Sec. 501(c)(4) organization must submit a user fee along with its completed Form 8976.
• Section 3.02(4) was amended to clarify that the section only applies to an organization seeking to qualify under Code Sec. 501(c)(6).
• Sections 4, 15, and 18 were amended to reflect the new Form 1024-A.
• Section 4.09 was amended to clarify that a request for expedited handling of a determination letter will not be forwarded to the appropriate group for action unless the application is complete.
• Section 13 was amended throughout because Rev. Proc. 2018-32, I.R.B. 2018-23, 739, superseded Rev. Proc. 81-7, 1981-1 CB 621.
• Appendix A was amended to reflect the single user fee for non-1023-EZ exemption applications, and to reflect a change in the user fee for submissions postmarked on or after July 1, 2019, for advance approval of Code Sec. 4942(g)(2) set asides, Code Sec. 4945 advance approval of an organization’s grant making procedures, and Code Sec. 4945(f) advance approval of voter registration activities.

Rev. Proc. 2019-7

This procedure provides an updated list of subject areas under the jurisdiction of the Associate Chief Counsel (International) for which it will not issue advance letter rulings or determination letters, or will issue letters only if justified by unique and compelling circumstances. Section 4.01(01) related to Code Sec. 367(a) has been removed as obsolete. There are no other changes except renumbering to reflect the foregoing and updates to cross references and citations. The new procedure supersedes Rev. Proc. 2018-7, I.R.B. 2018-1, 271

Eleventh-hour votes in Congress in December renewed a package of tax extenders for 2014, created new savings accounts for individuals with disabilities, cut the IRS’ budget, and more. At the same time, the votes helped to set the stage for the 114th Congress that convenes this month. Republicans have majorities in the House and Senate and have indicated that taxes are one of the top items on their agenda for 2015.

Eleventh-hour votes in Congress in December renewed a package of tax extenders for 2014, created new savings accounts for individuals with disabilities, cut the IRS’ budget, and more. At the same time, the votes helped to set the stage for the 114th Congress that convenes this month. Republicans have majorities in the House and Senate and have indicated that taxes are one of the top items on their agenda for 2015.

Extenders

The Tax Increase Prevention Act of 2014, signed into law by President Obama in December extends more than 50 individual, business and energy tax incentives retroactively to January 1, 2014. As a result, taxpayers can claim these incentives on their 2014 returns filed in 2015. The Act includes all of the popular incentives for individuals, such as the state and local sales tax deduction and higher education tuition deduction, as well as many business incentives, including the research tax credit, bonus depreciation and enhanced Code Sec. 179 expensing. A handful of extenders were not renewed, mostly targeted to energy efficiency. If you have any questions about the renewal of the extenders for 2014, please contact our office.

ABLE Act

As part of the extenders package, Congress approved the Achieving a Better Life Experience (ABLE) Act of 2014. The Act establishes ABLE accounts for individuals with disabilities. Funds in ABLE accounts may be used for qualified expenses of persons with disabilities. To fund these accounts, the Act:

• Adjusts for inflation some civil tax penalties
• Authorizes the IRS to certify qualifying professional employer organizations
• Excludes dividends from controlled foreign corporations from the definition of personal holding company income
• Increases the IRS’ levy authority on payments to Medicare providers
• Raises the Inland Waterways Trust Fund financing rate

IRS budget

The IRS goes into the 2015 filing season with a reduced budget. The omnibus spending agreement, signed into law by President Obama on December 16, cuts the IRS’ fiscal year (FY) 2015 budget by some $345 million. The omnibus spending agreement also instructs the IRS to improve its response times in helping victims of identity theft and reduce refund fraud. In response to the budget cuts, IRS Commissioner John Koskinen said the agency will freeze hiring and take other steps to reduce expenses. Koskinen also cautioned that revenue collection and tax enforcement could be impaired by the budget cuts as the agency will have to make do with less. Taxpayer audits were singled out by Koskinen as one area where cutbacks could have a negative effect.

Affordable Care Act

Congress also clarified the status of so-called expatriate health plans under the Affordable Care Act. These plans cover very specific groups of people, including participants in a group health plan who are aliens residing outside the United States and U.S. nationals about whom there is a good faith expectation of being abroad, in connection with his or her employment, for at least 180 days in a 12-month period.

The omnibus spending agreement exempts expatriate health plans, employer sponsors of these plans, and insurance issuers providing coverage under these plans from the health care coverage requirements of the Affordable Care Act. Additionally, the omnibus spending agreement treats these plans as providing minimum essential coverage for purposes of the Affordable Care Act’s individual mandate.

Multi-employer pension plans

The extenders package and the omnibus spending agreement amend the rules governing multi-employer pension plans. The provisions, supporters argued, are intended to shore-up many struggling plans. Opponents countered that the changes weaken protections for beneficiaries. The amendments to the multi-employer pension rules are very technical. Please contact our office for more details

114th Congress

The Tax Increase Prevention Act did not extend the extenders beyond 2014. As of January 1, 2015, they all expired again. During 2014, proposals to extend the incentives for two years or make them permanent were floated in Congress. The GOP-controlled House vote to make permanent bonus depreciation, enhanced Code Sec. 179 expensing and some charitable giving breaks, but these bills were not taken up by the Democratic-controlled Senate. This could change in the 114th Congress. The new leaders of the tax-writing committees, Rep. Paul Ryan, R-Wisc., chair of the House Ways and Means Committee, and Sen. Orrin Hatch, R-Utah, chair of the Senate Finance Committee, have both indicated their interest in addressing the extenders as part of comprehensive tax reform.

Any movement toward comprehensive tax reform will require cooperation between the White House and the Republican-controlled Congress. In December, President Obama said that he would be willing to work with Republicans on corporate tax reform but any decrease in the corporate tax rate would need to be paid for by revenue raisers elsewhere. The President also said that he wants to preserve and make permanent some temporary enhancements to individual tax breaks, such as the earned income credit. New Senate Majority Leader Mitch McConnell, R-Ky., also said in December that he could work with the White House.

Please contact our office if you have any questions about the 2014 year-end legislation or the new Congress.

2014 was a notable year for tax developments on a number of fronts. Selecting the "top ten" tax developments for 2014 necessarily requires judgment calls based upon uniqueness, taxpayers affected, and forward-looking impact on 2015 and beyond. The following "top ten" list of 2014 tax developments is such a prioritization. Nevertheless, other 2014 developments may prove more significant to any particular client, depending upon circumstances. Please feel free to contact this office for a more customized look at the impact of 2014 developments upon your unique tax situation.

2014 was a notable year for tax developments on a number of fronts. Selecting the "top ten" tax developments for 2014 necessarily requires judgment calls based upon uniqueness, taxpayers affected, and forward-looking impact on 2015 and beyond. The following "top ten" list of 2014 tax developments is such a prioritization. Nevertheless, other 2014 developments may prove more significant to any particular client, depending upon circumstances. Please feel free to contact this office for a more customized look at the impact of 2014 developments upon your unique tax situation.

Passage of the Extenders Package

2014 was not a year for major tax legislation in Congress. In fact, Congress even failed to pass its usual two-year Extenders package, instead settling on a one-year retroactive extension to January 1, 2014. As one Senator put it, "This tax bill doesn't have the shelf life of a carton of eggs," referring to the fact that the 50-plus extenders provisions, signed by the President on December 19, 2014, expired again on January 1, 2015. Instead, it has been left to the 114^th Congress to debate the extension of these tax breaks in 2015 and beyond, and for taxpayers to guess what expenses in 2015 will again be entitled to a tax break. 

Affordable Care Act

In many ways, 2014 was a transition year for the Affordable Care Act. One of the most far-reaching requirements, the individual shared responsibility provision, took effect on January 1, 2014. Another key provision, the employer shared responsibility, was delayed (in 2013) to 2015. However, employer reporting under Code Sec. 6605 was not delayed. The IRS also issued guidance on the Code Sec. 36B premium assistance tax credit and other provisions of the Affordable Care Act. Meanwhile, the Supreme Court announced it would review a decision by the Fourth Circuit Court of Appeals upholding IRS regulations on the Code Sec. 36B premium assistance tax credit, a critical component to making the Affordable Care Act viable nationwide.

International Compliance

The IRS and Treasury increased their focus on requirements that U.S. taxpayers report foreign income and assets. The government took the final steps to implement the requirements for U.S. taxpayers and foreign financial institutions to report foreign assets under the Foreign Account Tax Compliance Act (FATCA). The government also tweaked its programs to induce U.S. taxpayers to report undisclosed income and assets from prior past years. At the same time, the IRS and the Department of Justice went to court to seek civil and criminal penalties, including jail time, against willful tax evaders.

Repair Regulations

In 2014, the IRS finished issuing the necessary guidance on the treatment of costs for tangible property under the sweeping so-called “repair” regulations, which impact most businesses. The most important development was the issuance of final regulations on the treatment of dispositions of tangible property under MACRS and under Code Sec. 168, including the identification of assets, the treatment of dispositions, and the computation of gain and loss, particularly in the context of general asset accounts (TD 9689). The IRS also issued several revenue procedures that granted automatic consent for taxpayers to change to the accounting methods allowed by the final regulations (including Rev. Proc. 2014-16 & 54).

IRS Operations

IRS Commissioner John Koskinen predicted a complex and challenging filing season due to cuts in the Service’s funding. Koskinen highlighted the Service’s having to do more with less because of reduced funding. In addition, the IRS is funded at $10.9 billion for FY 2015, which is $1.5 billion below the amount requested by the White House. The FY 2015 budget reduction "undercuts our ability to enforce the Tax Code," Koskinen said. "We will do everything we can to protect the integrity of the filing season." More budget cuts could cause "the wheels to start to fall off," he noted.

Net Investment Income (NII) Tax

Many higher-income individuals were surprised to learn the full impact of the net investment income (NII) tax on their overall tax liability only during the 2014 filing season when their 2013 returns were filed. Starting in 2013, taxpayers with qualifying income have been liable for the 3.8 percent net investment income (NII) tax. The threshold amounts for the NII tax are: $250,000 in the case of joint returns or a surviving spouse, $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in any other case. Recent run ups in the financial markets, and the fact that the NII thresholds are not adjusted for inflation, have increased the need to implement strategies that can avoid or minimize the NII tax. Issues persist that reduce certainty surrounding NII tax liability, in particular determining how a taxpayer "materially participates" in an activity to the extent it is exempt from the NII tax.

Retirement Planning

A number of changes have been made during 2014 affecting IRAs and other qualified plans which, cumulatively, rise to the level of a “top tax development” for 2014:

• Notice 2014-54 now permits a distribution from a 401(k), 403(b) or 457(b) account to have the taxable and non-taxable portions of the distribution directed to separate accounts.  
• TD 9673 now permits IRA holders and defined contribution plan participants to obtain a “longevity” annuity to help insure that they will not outlive their required minimum distributions (RMDs).
• Notice 2014-66 now permits 401(k) plans to offer deferred annuities through target date funds (TDFs).
• Bobrow, TC Memo. 2014-21, held that, in contrast to the IRS guidance in Publication 590, a taxpayer is limited to one 60-day rollover per year for all IRA accounts under the tax code rather than one 60-day rollover per year for each IRA account. The IRS in Announcement 2014-32 stated that the new interpretation of the rollover rules would be applied to rollover distributions received on or after January 1, 2015.
• Clark v. Rameker, a 2014 Supreme Court decision, found that inherited IRA accounts were not retirement assets and therefore not subject to creditor protection under the Bankruptcy Code.

Identity Theft

Although clearly not confined to the area of federal tax, identity theft has been a major issue for both the IRS and taxpayers. In 2014, the IRS put new filters in place and took other measures to curb tax-related identity theft. The agency also worked with software developers, financial institutions and the prepaid debit card industry to combat identity theft. "We rejected 5.7 million suspicious returns last year that may have been tied to identity theft," IRS Commissioner Koskinen said. Nevertheless, few believe that the IRS has yet turned the tide.

Same-sex Marriage

After the Supreme Court struck down Section 3 of the Defense of Marriage Act in Windsor, the IRS issued guidance in 2013 adopting a place of celebration approach to recognizing same-sex marriage. The IRS followed-up with additional guidance in 2014 that required employers to take note of Windsor with regard to workplace tax benefits. Notably, the IRS focused on what changes needed to be made to retirement plan benefits in light of Windsor.

Tax Reform

Although 2014 was clearly not the year for tax reform (despite some 2013 forecasts that it would be), the foundations for serious tax reform discussions were laid in 2013 and 2014, when Congressional hearings and studies took place. Looking ahead to 2015 and beyond, there is optimism that Congress will complete some form of tax reform in 2015 or 2016.

The major difference of opinion, however, surrounds whether or not the reform would only address corporate tax provisions or also include individual provisions. Corporate reform has been pushed into the spotlight lately both by the controversy surrounding corporate inversions in changing foreign headquarters and by the general concern that American international business competitiveness is lessened by high U.S. corporate tax rates. House Ways and Means Committee Chairman Dave Camp, R-Mich., on the other hand has called for tackling comprehensive tax reform on both the business and individual side. His Tax Reform Bill of 2014 (HR 1) would make the Code "more effective and efficient," according to Camp, by getting rid of narrowly targeted provisions to lower tax rates across the board. "This will enable small and large businesses alike to expand operations, hire new workers, and increase benefits and take-home pay," he said.