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Monthly Newsletter for ncpeFellowship Members Vol. 11 No. 7 July 2020

"How much should I charge for this?", a question from many members. Remember, we do not sell tax returns, we sell our knowledge and expertise. We sell our accuracy and our advocacy. We do our jobs reasonably and professionally.

And, then the occasional call from a Member to just ask how I am doing or to thank me for something they enjoyed or needed.

New memberships, renewals, email updates, always something to do.

It is about 6:00 pm now, time to shut down for the evening, because Scarlet, "Tomorrow is another day."

BeannaBeanna@ncpefellowship.com or 877-403-1470

Fellowship

Remarks from Beanna

A Day in the Life of the Fellowship

Office opens 8:00 am, or a little later, depending upon how much week there was in the weekend - always something to do.

First, check email from Fellowship Members with questions. Some fairly quickly answered, and then there is always one or two that need some research and an occasional one that begs further clarification.

The phone rings, "ncpeFellowship, this is Beanna". A question, quick answer - another question, I'll get back as need to research and email research. My favorite is when the Member says, "This is a quick question and I know you will know the answer." There are no quick questions and no quick answers, so 1/2 hour later, we are finished.

More frequently of late, the Member question about Ethics. My usual response is, "What do you think?" I've learned through the years that questions about ethics are very difficult to approach unless you have the person's buy-in. Generally, the Member wants to help their client and are having difficulty with the issues presented to them. Quite recently I was asked about a Member taking on a new client who could not present a set of books, had been to 3 accountants in the last 3 years and could not answer questions about their business. I listened and then said, "It would appear to me this will be the best money you never made." Finally, after a long pause, she laughed and said, "You are right. I'll just get her an extension and tell her I cannot prepare her return." "Why prepare an extension of time to file?" I asked. To do so would have implied a client relationship with the taxpayer, let her return preparer prepare her extension. The Member said, "Absolutely, I'll do that." You see we get too involved in trying to help to analyze the situation and sometimes it takes someone to make us stop to see what is going on.

HappyHappy4th Of July4th Of July

Independence DayIndependence Day

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Remarks From Beanna (1)

Tax News (5)IRS Tax Deadline Is July 15, Extend To October To Cut Audit Risk? (5)Guidance on the Elimination of the Deduction of Qualified Transportation Fringe Benefit Expenses (5)Relief for Taxpayers Affected by COVID-19 Who Take Distributions or Loans From Retirement Plans (6)Reporting Refundable Minimum Tax Credit on Form 990-T (6)H&R Block to Change IRS Relationship, Free Tax Filing Offerings (7)How to Use the PPP and EIDL Together (7)Cannabis, Accounting, Cost of Goods, and Taxation (8)TASC Users Watch Your Mail for Important, Time-sensitive Tax Documents from TASC! (10)Here Is Who Qualifies a Taxpayer for the Child and Dependent Care Credit (11)Proposed Regulations Address Primary Care and Health Sharing Ministries (11)Latest PPP Loan Bill Has Not Reduced Confusion (12)Increase the Rate of Return with Cost-segregation Study (12)Considering an Early Retirement Withdrawal? CARES Act Rules and What You Should Know. (13)CARES Act is Not Short on Individual Income Tax Relief (15)Social Security Unveils Redesigned Retirement Benefits Portal at Socialsecurity.gov (15)

Practice Management (16)Grow Your Practice - Grow Your Value (16)

Question of the Month (16)Taxpayers e-filed Return with Refund, Not Received. What to Do? (16)

Military News (17)States that Do & Do Not Tax Military Retirement Pay (17)

Estate and Trust News (18)Tax Strategies to Consider When Planning Your Estate (18)Temporary Safe Harbor Provided for Trusts Holding Rental Real Estate (19)

News from Capital Hill (20)HFA Pushes Against PPP Tax ‘Gut Punch’ (20)Senators Weigh Letting Firms Accelerate Tax Break (21)President Trump Announces Tax Credit Plan for Visiting Restaurants and Traveling in the U.S., Reports Bambridge Accountants New York (21)

People in the Tax News (22)Matawan Resident Faces Federal Charges, Including Tax Evasion (22)Operators of California Charity Plead Guilty to Mail Fraud Conspiracy and Tax Evasion (22)Virginia Resident Indicted for Employment Tax Evasion and Obstructing the IRS (23)

IRS News (23)Reminder: IRS Will Be Closing Some P.O. Boxes On July 1; Will Not Forward Checks (23)IRS Announces Rollover Relief for Required Minimum Distributions from Retirement Accounts that Were Waived Under the CARES Act (24)IRS Extends Deadlines for Employment Taxes, Benefit Plans, Etc. Because of COVID-19 (24)Temporary Relief from Physical Presence Rule for Retirement Plan Participant Elections (25)Proposed Regulations Address Direct Primary Care Arrangements and Health Care Sharing Ministry Memberships (26)IRS Outlines Changes to Health Care Spending Available Under CARES Act (26)IRS Provides Answers About Coronavirus Related Tax Relief for Qualified Opportunity Funds and Investors (27)

Table Of Contents (page)

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Interest Rates Decrease for the Third Quarter of 2020 (27)Questions and Answers about NOL Carrybacks of C Corporations to Taxable Years in which the Alternative Minimum Tax Applies (27)Proposed Regulations Define Real Property for 1031 Tax-free Like-kind Exchanges (28)IRS Adds Bentley Plug-in Electric Vehicle to Credit List (31)IRS Finalizes Guidance for the Section 199A Deduction for Shareholders of Regulated Investment Companies (31)IRS Rule Would Implement Excise Tax On Certain Executive Compensation (31)Final Qualified Business Income Deduction Regulations Include Suspended Loss Rules (32)EIP FAQs Updated to Include Information on Tracing Payments (34)

Tax Pros in Trouble (35)Brockton Tax Preparer Indicted for Tax Fraud (35)Dallas-Fort Worth Man is Sentenced to Prison in $2.8 million Tax-return Prep Scheme (35)Justice Department Seeks to Shut Down Fraudulent Chicagoland Tax Return Business (35)Alabama Tax Preparer Indicted for Filing False Returns (36)

Ragin Cagin (36)Report the Death of a Social Security or Medicare Beneficiary (36)

Taxpayer Advocacy (37)IRS Provides Information on Effect of COVID-19 on Audits (37)IRS Chief Counsel Goes Virtual with National Settlement Days; Helps Dozens of Taxpayers Settle Their Tax Court Cases (37)IRS Updates Information on Delinquent Debt/passport Certification and Revocation (38)IRS Continues Efforts to Address Income Verification Backlog (38)IRS Offers Settlement for Syndicated Conservation Easements; Letters Being Mailed to Certain Taxpayers with Pending Litigation (38)IRS Updates Third-party Contact Notice Procedures for Collecting Debtor’s Taxes (39)IRS Policy on Closing Letters When There Is Bankruptcy Stay (40)Tax Court Resumes Accepting Requests for Copies of Court Records from Non-parties (41)Tax Court Will Conduct Proceedings Remotely (41)

Foreign Tax (41)COVID-19 Relief for Entities with Income Not Effectively Connected to US Trade or Business (41)FAQs for Aliens Claiming Medical Condition or Travel Exceptions to Substantial Presence Test (42)Lists of Countries with 2020 Nonresident Alien Interest Reporting Requirements (43)

State News of Note (44)California Assembly Bill 3143 Enters Phase Two, Aiming to Increase the Protection of Taxpayers Against Fraud (44)California Budget Includes Major Revenue Raisers and Other State Tax Law Changes (44)IRS Extends July 15, Other Upcoming Deadlines for Tornado Victims in Parts of the South; Provides Other Relief (47)Louisiana Taxpayers Diagnosed With Covid Could See More Relief (47)

Wayne's World (48)United States of America, Appellee, v. Louis Kovel, Defendant-appellant, 296 F.2d 918 (2d Cir. 1961) (48)

Letters to the Editor (51)

Tax History (51)The IRS Commissioner (51)

Tax Quotes (54)

Sponsor of the Month (54)Campisi Financial Network (54)

Table Of Contents (page)

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Tax News

IRS Tax Deadline Is July 15, Extend To October To Cut Audit Risk?

Robert W. Wood

Tax returns are due April 15 most years, but 2020 has hardly been a normal year. The IRS moved the big April 15 tax filing deadline to July 15, but that will be here before you know it. There was widespread speculation that the IRS would extend the July 15 deadline further, but the IRS Commissioner confirmed that is not in the cards. But instead of rushing to file your taxes, you can go on extension to October 15. It is automatic on request, and incredibly easy to do. But should you take advantage of the extra time? It is tempting to succumb to the allure of the extra months, but there are those nagging questions. If you extend, do you increase your odds of audit. Conversely, maybe you actually decrease your audit odds, or are they the same?

For most people, few deadlines are more dreaded than the annual rush to file. Many people do not want to put off that deadline, since getting past it can seem like such a watershed event every year. In fact, some people may even feel guilty if they take advantage of that tempting automatic six-month reprieve. There’s no shame in an extension. Millions of them are processed every year. Everyone can automatically get until October 15 by filing (electronically or by mail) a tiny form. It doesn’t even require a signature. It couldn't be easier. Of course, the extension is to file your tax return, it is not an extension of time to pay. Thus, you need to pay—normally by April 15, but this year by July 15—what you expect to owe when you actually file your taxes later in the year, anytime up until October 15th. But are there good reasons to take the extension? You bet.

Perhaps the best reason to extend is that going on extension encourages reflection. Many returns filed right at the deadline are filed in haste, some carelessly. That will probably be true in July, maybe even more so than the usual April 15 date. And that can bring on an audit. Extensions can allow time to gather records, consider reporting alternatives, and get professional advice. After all, tax returns must be signed and filed under penalties of perjury. It is best to file accurately so you don’t have to amend later. Amended returns often come about because people are in a rush. Amending isn't necessarily bad, of course. There are times you may want or need to amend your return. But try to use amended returns sparingly. For one

thing, amended returns are much more likely to be scrutinized. File once correctly so you do not need to do it again.

The IRS doesn't even have to approve the extension. It is automatic, and there is no discretion involved. You automatically get the extra six months, period. Extensions used to be four months, with two additional months only if you had a good reason. But now, automatic extensions are for a full six months. You may not need all that time, and once you extend, you can file whenever you would like between April 15 and October 15. That time comes in useful in other ways too. For example, going on extension also allows for corrected Forms 1099 and K-1. You may be waiting for Forms K-1, gathering documents or seeking professional advice. Time is on your side with an extension.

If there are debatable points on your return, such as whether a litigation recovery is ordinary or capital, take the time to get some professional advice. Besides, even if you have all your forms ready, what if you receive a Form K-1 or 1099 after you file? It happens a lot, and the earlier you file your return, the greater the risk you will receive corrected forms that may make you need to amend. Going on extension makes it less likely that you will be surprised by a tardy corrected Form K-1 or 1099. You may as well file once and file correctly.

And then there are all the stories about audit risk. Some people say that going on extension increases audit risk, while some people say the opposite. There appears to be no hard evidence to prove either theory. However, it is worth stressing that there is no evidence that there is an increased audit risk if you go on extension. In fact, on the contrary, given all the advantages of an extension, one can argue that an extension can actually help reduce your audit risk. All taxpayers worry about IRS audit risk. Opinions vary, and there are many old wives tales about what triggers an audit.

However, it is unlikely that going on extension increases IRS audit risk. The IRS releases data about audit rates based on income levels and types of tax returns. The IRS does not release data about whether going on extension increases or decreases your chances. But I still say extensions encourage reflection and care, and that alone reduces audit risk. So, going on extension if you need the time can just make sense. To extend, you can submit a Form 4868, ask your tax return preparer, use commercial software, or do it yourself electronically. For more guidance, check out IRS tax topic 304, covering extensions of time to file your tax return.

Guidance on the Elimination of the Deduction of Qualified Transportation Fringe Benefit Expenses

The Internal Revenue Service has issued proposed regulations that provide guidance for the deduction of qualified transportation fringe and commuting expenses.

The Tax Cuts and Jobs Act (TCJA) does not allow deductions for qualified transportation fringe (QTF) expenses and does not allow deductions for certain expenses of transportation and commuting between an employee’s residence and place

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of employment.

The law also provided that a tax-exempt organization’s unrelated business taxable income is increased by the amount of the QTF expense that is nondeductible. However, on December 20, 2019, this was repealed as part of the Further Consolidated Appropriations Act of 2020. This repeal was retroactive to the original date of enactment by the TCJA.

These proposed regulations specifically address the elimination of the deduction for expenses related to QTFs provided to an employee of the taxpayer. The proposed regulations also provide guidance and methodologies to determine the amount of QTF parking expense that is nondeductible.

The guidance also includes definitions and special rules to clarify and simplify the calculations underlying the methodologies.

Relief for Taxpayers Affected by COVID-19 Who Take Distributions or Loans From Retirement Plans

The Internal Revenue Service has released Notice 2020-50 to help retirement plan participants affected by the COVID-19 coronavirus take advantage of the CARES Act provisions providing enhanced access to plan distributions and plan loans. This includes expanding the categories of individuals eligible for these types of distributions and loans (referred to as “qualified individuals”) and providing helpful guidance and examples on how qualified individuals will reflect the tax treatment of these distributions and loans on their federal income tax filings.

The CARES Act provides that qualified individuals may treat as coronavirus-related distributions up to $100,000 in distributions made from their eligible retirement plans (including IRAs) between Jan. 1 and Dec. 30, 2020. A coronavirus-related distribution is not subject to the 10% additional tax that otherwise generally applies to distributions made before an individual reaches age 59 ½. In addition, a coronavirus-related distribution can be included in income in equal installments over a three-year period, and an individual has three years to repay a coronavirus-related distribution to a plan or IRA and undo the tax consequences of the distribution.

In addition, the CARES Act provides that plans may implement certain relaxed rules for qualified individuals relating to plan loan amounts and repayment terms. In particular, plans may suspend loan repayments that are due from March 27 through Dec. 31, 2020, and the dollar limit on loans made between March 27 and Sept. 22, 2020, is raised from $50,000 to $100,000.

As authorized under the CARES Act, Notice 2020-50 expands the definition of who is a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual

arising from the impact of the COVID-19 coronavirus on the individual’s spouse or household member. As expanded under Notice 2020-50, a qualified individual is anyone who –

• is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, “COVID-19”) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or

• experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s principal residence):

• being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;

• being unable to work due to lack of childcare due to COVID-19;

• closing or reducing hours of a business that they own or operate due to COVID-19;

• having pay or self-employment income reduced due to COVID-19; or

• having a job offer rescinded or start date for a job delayed due to COVID-19.

Notice 2020-50 clarifies that employers can choose whether to implement these coronavirus-related distribution and loan rules, and notes that qualified individuals can claim the tax benefits of coronavirus-related distribution rules even if plan provisions aren’t changed. The guidance clarifies that administrators can rely on an individual’s certification that the individual is a qualified individual (and provides a sample certification), but also notes that an individual must actually be a qualified individual in order to obtain favorable tax treatment. Further, Notice 2020-50 provides employers a safe harbor procedure for implementing the suspension of loan repayments otherwise due through the end of 2020, but notes that there may be other reasonable ways to administer these rules.

Employers, financial institutions, and individuals should refer to Notice 2020- fo50r more details about how the CARES Act rules for coronavirus-related distributions and loans from plans apply.

Reporting Refundable Minimum Tax Credit on Form 990-T

The IRS has provided instructions for how exempt organizations report a refundable minimum tax credit (MTC) for 2018 and 2019 on Form 990-T (Exempt Organization Business Income Tax Return (and proxy tax under section 6033(e)) on its web site.

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decisions of other members.

A Treasury Department spokesperson did not immediately return FOX Business’ request for comment.

The Free File program has been the source of controversy throughout recent years, after ProPublica reported that some companies were engaging in deceptive practices and obscuring their free products from organic searches online.

A follow-up report showed that five of the 12 members of the program used a coding device to keep their Free File landing pages out of organic searches.

Lawmakers pointed out last week that the most common way taxpayers find preparation options is through Google search, and 85 percent of people click on advertisement links that promote commercial products on Free File Alliance members’ websites. “Only a fraction” of total visits were routed from Google directly through to a company’s Free File product.

According to the IRS, about 57 million taxpayers have used the program since its debut in 2003. In 2018 alone, however, more than 100 million taxpayers met the criteria for the free filing option.

How to Use the PPP and EIDL Together

By Janet Berry-Johnson, CPA

Note: This article reflects the latest changes from the PPP Flexibility Act, which was signed into law on June 4, 2020.

The SBA has two loan programs to help small businesses impacted by COVID-19: Economic Injury Disaster Loans (EIDLs) and the Paycheck Protection Program (PPP). If your business is eligible, you can get both of these loans and use the funds at the same time, as long as you don’t use them for the same purpose.

The definition of permitted use of EIDL funds is broad. They can be used for financial obligations and operating expenses that could have been met had the disaster not occurred.

For PPP loans, the definition of permitted use is much narrower—to be eligible for forgiveness, at least 60% of the loan must be used to fund payroll and employee benefit costs. The remaining 40% must be spent on mortgage interest payments, rent, and utilities.

The PPP application will ask you to certify that you’re using the funds for payroll and utilities/rent/mortgage interest. If you spend the funds on something outside of those categories, you could be charged for fraud.

If you spend the funds on the right things but not the right ratio (eg. you spend 60% of the funds on rent and 40% on payroll), you’ll be charged 1% interest on the funds outside of the ratio range. Unforgivable loan expenses are treated like a 5-year SBA loan—but again, “unforgivable” in this case means it’s

In general, any tax-exempt organization must file Form 990-T if it has unrelated business taxable income (UBTI) of $1,000 or more. (Reg § 1.6012-2(e)) Form 990-T reports not only income, but also credits that the organization is eligible for. (Line 51(g), Form 990-T (rev. 2019))

Some exempt organizations are also subject to the alternative minimum tax (AMT). (Line 43, Form 990-T)

Organizations subject to the AMT might be eligible for a refundable MTC for 2018 and 2019. (Code Sec. 53(e)(1)) To receive a refundable MTC, the organization must file Form 8827 (Credit for Prior Year Minimum Tax-Corporations). (Instructions to Form 8827)

Form 990-T reporting. A Form 990-T filer who is completing Form 8827 and claiming a refundable MTC for 2018 or 2019 (line 8c (2018) or line 5c (2019) of Form 8827) reports the credit on Form 990-T as follows:

• On a 2018 Form 990-T, report the credit on line 50g, Other credits, adjustments, and payments. Check the "Other" box. Enter "F8827" and the amount of the credit.

• On a 2019 Form 990-T, report the credit on line 51g, Other credits, adjustments, and payments. Check the "Other" box. Enter "F8827" and the amount of the credit.

H&R Block to Change IRS Relationship, Free Tax Filing Offerings

By Brittany De Lea, FOXBusiness

Individuals with incomes of $69,000 or less are eligible to use the Free File program — a partnership with third-party preparers. About 70 percent of taxpayers qualify, according to the IRS.“We think we’re leaving the program on strong footing, having three years of growth in a row,” executives said during the company’s fourth quarter earnings call.

The decision was made “in the best interest of the company,” leaders said.

A spokesperson for H&R Block told FOX Business that the company will continue to help individuals file their taxes for free, through its own product offerings.

"We are proud of our nearly 20-year participation in the IRS Free File Program, and while we will end our participation in the program at the end of this tax season on Oct. 15, we will continue offering taxpayers opportunities to file for free," the company spokesperson said.

H&R Block executives said the door for the IRS to offer its own free filing software remains open, adding that they don’t believe their decision to leave the alliance makes that outcome any more – or any less – likely.

There are 11 other third-party participants in the Free File Alliance – and H&R Block said it wasn’t aware of any of the

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still in the right categories, just not in the right 60/40 ratio of payroll to utilities/rent/mortgage interest.

Keep in mind there are a few other stipulations for loan forgiveness as well, such as maintaining your headcount numbers, and keeping pay rates the same.

So what happens if you get an EIDL and later apply for a PPP loan? In that case, you may need to refinance the EIDL loan with the PPP loan. Essentially, you’ll get a bigger PPP loan and use part of it to pay off your outstanding EIDL.

If the EIDL was not used for payroll costs, it doesn’t have any impact on your PPP loan. However, if you took out an EIDL before April 3, 2020, and used it for payroll expenses, you must refinance the EIDL by carrying over the EIDL balance into your PPP loan.

Let’s look at an example of how that works. To calculate your maximum PPP loan, you take:

• The lesser of $10 million, or 2.5 times a business’s average total monthly payroll amount for calendar year 2019

• Plus the outstanding amount of any EIDL loan made between January 31, 2020, and April 3, 2020

• Minus any EIDL advance you received

Say Yami Yoga Studio’s average monthly payroll for the PPP loan amount calculation is $10,000 per month. At 2.5 times their payroll, the maximum loan amount would be $25,000. However, the business also received an EIDL in March of 2020, which has a balance of $15,000. The company could get a $40,000 PPP loan—that’s $25,000 plus $15,000 to pay off the existing EIDL—which is sent directly to the SBA.

When it comes time for Yami Yoga Studio to apply for forgiveness, the company needs to document how it used the proceeds of both loans in calculating the 60/40 percent ratio.

For example, say the company used $10,000 of the $15,000 EIDL to pay salaries of employees and the other $5,000 on rent and utilities.

With the remaining $25,000, Yami Yoga Studio will need to spend at least $14,000 on payroll costs to reach the 60% threshold. The remaining $11,000 can be spent on other eligible expenses. Here’s a better look at the math:

The EIDL allows small business owners to request an advance of up to $10,000. While the SBA refers to this as an advance,

it doesn’t have to be repaid, even if your EIDL application is ultimately rejected. The advance can be used for maintaining payroll, proving sick leave to employees, rent or mortgage payments, and other obligations.

If you receive an EIDL advance and a PPP loan, proceeds from the advance will be deducted from the loan forgiveness amount.

To illustrate, let’s modify our example from earlier. Say Yami Yoga Studio gets a $25,000 PPP loan, then later receives a $5,000 EIDL advance. The amount of the advance would be deducted from the forgivable amount of the PPP loan. So even if the company follows all of the loan forgiveness rules, the most that can be forgiven is $20,000. You would need to repay the remaining $5,000 to your lender.

A common question is how to calculate the 60/40 percent split. Is it based on the original PPP loan amount of $25,000? Or the forgivable amount of $20,000? And would you have to pay the 1% interest rate on the remaining $5,000?

Currently, the forgivable amount scales with your payroll costs. While the forgiveness application has not yet been updated to reflect the newest bill, your payroll costs will likely be divided by 0.60 to determine your maximum forgivable amount. The more you spend on payroll, the more you can ultimately get forgiven. The SBA and the U.S. Treasury are still working on rules for calculating forgiveness, and this may change as further guidance is issued.

Because many small businesses are running into problems meeting that threshold, even with the best intentions, the newest PPP bill has reduced the original 75/25 rule to the current 60/40 requirement, and extended the amount of time businesses have to fully spend the funding.

Still, remember that this is a “payroll protection” program, not a small business protection program. The intention of Congress in creating the PPP was to keep U.S. workers employed. For that reason, small business owners should make an effort to meet the 60% threshold—especially if they want a portion of the loan to be forgiven.

Cannabis, Accounting, Cost of Goods, and Taxation

Having worked with many medical marijuana growers, processors, and dispensaries in Oklahoma, it has become abundantly clear that the cannabis industry still lacks best business practices and accounting support. As I meet with business owners during my capacity as a c-suite consultant, the stress of the cannabis business is ever-present.

Many operators finished 2018 with high hopes, only to discover the tax bill that awaited them was unlike anything they anticipated! Even those who engaged bookkeepers, accountants, and other “professional” help were caught unaware. As I searched for articles to share with those in the cannabis industry, I quickly realized most were written for

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peers, not business owners.

This article will detail the issue of accounting, recordkeeping, and taxation for cannabis companies, primarily focusing on dispensaries. A later article will spend time on processors and growers.

The Complexity of the Issue

Basis of the Issue: Cannabis is Federally Classified

Let’s start at the beginning: the causal factor for the cannabis conundrum rests in the fact that marijuana is illegal because it is listed as a Schedule I Controlled Substance under the federal Controlled Substances Act:

Substances in this schedule have no currently accepted medical use in the United States, a lack of accepted safety for use under medical supervision, and a high potential for abuse. Some examples of substances listed in Schedule I are: heroin, lysergic acid diethylamide (LSD), marijuana (cannabis), peyote, methaqualone, and 3,4-methylenedioxymethamphetamine (Ecstasy).

Because marijuana is still listed as a Schedule I drug, its sale is illegal at the federal level. This is the basis of the conflict for legalization, which affects accounting, which rolls into taxation, and the discrepancy between state and federal government. Cannabis business owners are caught in the grind.

Why are my Business Expenses not Tax Deductible?

Prior to the state legalization of marijuana, 280E was a largely inconsequential IRS rule. IRS 280E specifically deals with taxpayers who sell Schedule I or II drugs as a business and essentially states that the federal government does not see the business as legal and does not allow for expenses (rent, salaries, utilities, etc.). Instead, the government only allows for something called Cost of Goods Sold (COGS). Cost of Goods Sold, specifically, is the cost of what was purchased to resell (flower, edibles, etc…). For dispensaries, this is the cost you paid for the product (plus shipping, if applicable). No other costs are allowed to be used to reduce your income subject to tax.

As detailed in Table 1 below, most businesses in the US would expect to pay income taxes on the Net Income (at the bottom of the table) of $4,500.00. The Net Income is (Net Sales – Cost of Goods Sold – Expenses).

Cannabis businesses, however, ARE NOT taxed like other businesses in the US. Based on IRS 280E, they are NOT allowed to deduct any costs other than the cost of their product (Cost of Goods Sold). Therefore, cannabis businesses will be taxed on Gross Profit (Net Income – Cost of Goods) of $50,000.00! That is a major difference in tax liability that results in taxes being charged on $50,000 versus $4,500.

Business Setup – Can it Help?

There are a few ways to go about establishing (setting up) your company. It is important to know the difference between the corporate structures as well as the difference between state and federal designations.

IRS (Federal) Designations

Regarding taxation, there are essentially two types of classifications: Taxable Entities and Passthrough Entities. There are also two types of Corporations: C corporations and S corporations. For the purposes of taxation, C corporations are significant because they are legal entities that are separate and distinct from their owners.

Initially, accountants and attorneys advised cannabis clients to set up as C corporations. This was primarily due to the difference in tax rates between C corporations and other types of tax entities.

Because cannabis businesses are paying taxes on such a larger amount (Gross Profit, not Net Profit), C corporations offered some advantage. The corporate tax rate is approximately 20% (actually 21%), while the highest personal tax rate is around 37%.

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Good Recordkeeping

The breaking points in the cases that have gone to trial have largely come down to poor record-keeping. In business, if it is not documented, it did not happen! (Especially to the IRS).

From a ruling in Alterman V Commissioner, TC Memo 2018-83, the court viewed the lack of separation of separate services as an “after the fact” attempt to make one business look like two businesses. Good bookkeeping would have allotted revenue to each service, along with the expense (Cost of Goods) incurred to earn the revenue.

Good recordkeeping costs more! It may require two sets of books, two business setups, and two tax returns if the businesses are run separately. The extra costs MAY be very small compared to the benefits.

Regardless of the type of business you choose to set up, good record-keeping is paramount for audit readiness!

Job Descriptions

Vertically integrated cannabis businesses (those who own both grow and dispensary; grow and processing; or grow, processing, and dispensary operations) have some advantages over simply owning a dispensary (as will be discussed later).

However, in keeping with good record keeping, these companies need to invest the time (or money, if you would like to outsource it) to write good job descriptions. It will not be sufficient to say, “I have a person who works the dispensary, so I pay them for that. Also, they work in processing, so I pay them for that as well.” The IRS may well deem all the salary costs to the dispensary, where labor IS NOT a part of Cost of Goods therefore it doesn’t reduce the dispensary’s revenue.

Detailed job descriptions as well as documented work hours, by job or process, will be of huge benefit during an audit.

Accounting and Taxation

Proper accounting is the gateway to proper taxation. Tax preparers utilize accounting to determine taxable income. Tax preparers are charged with assimilating data into a properly filed tax return, based on the information given to them.

If COGS are incorrect from accounting, they will be incorrect on the Tax Return. For cannabis, accounting, simply stated, is a service you cannot afford to be without.

Knowing what items are allowed to be part of COGS for dispensaries is THE major hurdle to having proper and accurate accounting. Only inventory purchases and shipping for inventory to your dispensary are allowed as COGS items for Dispensaries.Items not allowed under COGS for dispensaries include:

• Rent

• Salaries• Contract Labor• Storage• Display Cases• Utilities• Insurance• Professional Fees• Licenses and Fees

Audit and Audit Ready

The chance of a business getting audited in the US is approximately 1.5%. This number fluctuates from year to year but remains relatively stable. For marijuana business operators, the chance of an audit has been reported as high as 10 to 15 percent, according to the Cannabis Business Professionals of Oklahoma.

While getting audited can be intimidating, being properly prepared is key. If you have invested the time in choosing an accounting firm that is familiar with marijuana businesses, gives you sound advice on what you may and may not deduct, and prepares solid financials (thus, data for your tax return), you will come through the audit just fine. Again, preparation is key! Remember: of the major cases that have been tried, most noted poor bookkeeping and accounting as contributing factors to higher taxes, leading to penalties and interest costs.

Conclusion

In review, cannabis dispensaries are only allowed to deduct Cost of Goods Sold (COGS) from net revenue to determine the business’ taxable income attributable to the owners. The lack of proper classification for Cost of Goods Sold purchases (inventory and shipping of inventory to the dispensary) can lead to a massive increase in the already-high tax exposure facing cannabis dispensaries.

Remember, typical business expenses (operating expenses) are not allowed for cannabis dispensaries in regard to taxation. Cannabis businesses pay taxes on the profit left after the purchase of the product. Storage, shelving, rent, insurance, and other normal business expenses are not taken into consideration for federal (and Oklahoma state) taxation.

TASC Users Watch Your Mail for Important, Time-sensitive Tax Documents from TASC!

Due to requirements resulting from the Patient Protection and Affordable Care Act (PPACA), employers who offer employer-sponsored benefits are required to file IRS Tax Form 720 and pay a small fee. This will impact Plan years ending 2012-2029. Don’t worry; TASC has you covered!

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Fee helps to fund research and consumer-based health decisions

Established by PPACA, the Patient-Centered Outcomes Research Institute (PCORI) is charged with examining the relative health outcomes, clinical effectiveness, and appropriateness of different medical treatments by evaluating existing studies and conducting its own. The Institute will be funded in part by employer-paid fees.

This means you will have to file an additional tax form and pay a small fee by July 31st each year. The fee total will be $2.54 per Plan Participant.

What do you need to do?

TASC is committed to keeping you and your Plan in compliance and backs every AgriPlan, BizPlan and No Limit Plan with our Audit Guarantee. To help ensure compliance, please watch your mail for a pre-filled IRS Tax Form 720 from TASC containing the required PCORI information.

You will need to:

• Verify your EIN number (this cannot be your Social Security number)

• Sign the form

• Include payment and voucher

• Ensure your completed form with payment is mailed to the IRS and postmarked no later than July 31, 2020

• Mail to the Department of Treasury, Internal Revenue Services, Ogden, UT 84201-0009

If you are already filing IRS Tax Form 720, please contact your tax preparer to include the PCORI calculation and fee on your form submission.

If you have corrections to the mailed pre-filled Form 720 you can download, create, and print a corrected fillable PDF Form 720 from the IRS website. As always, if you need further assistance please contact our Customer Care Center at 800.422.4661.

TASC has you covered!

Of all the changes created by PPACA, few are more confusing than the rights and protections now offered to employees. This is compounded by the potential of significant penalties for failing to comply. Our benefits experts make the job of complying with these ever-changing regulations quick and painless.

We will continue to monitor future mandates to keep you informed and to ensure your Plan remains in compliance with changes as they occur. If you have any questions about PCORI, AgriPlan, BizPlan or your No Llimit Plan, contact:

TASC at 800.422.4661.

2302 International LaneMadison, WI 53704-3140

Brad Cocheran

Brad Cocheran has owned over 20 separate businesses during his life. He is part owner at Cocheran and Associates, an accounting firm in Oklahoma. Brad is a nationally certified bookkeeper and has a Masters in Accounting and Finance.

Here Is Who Qualifies a Taxpayer for the Child and Dependent Care Credit

Childcare or adult dependent care can be a major expense. Fortunately, the child and dependent care credit can provide some relief. Taxpayers who pay for daycare expenses may be eligible to claim up to 35% of what they spend; limits apply.

For the purposes of this credit, the IRS defines a qualifying person as:

• A taxpayer’s dependent who is under age 13 when the care is provided.

• A taxpayer’s spouse who is physically or mentally unable to care for themselves and lived with the taxpayer for more than half the year.

• Someone who’s physically or mentally unable to take care of themselves and lived with the taxpayer for six months and either:

a) The qualifying person was the taxpayer’s dependent or

b) They would have been the taxpayer’s dependent except for one of the following:

• The qualifying person received gross income of $4,200 or more

• The qualifying person filed a joint return

• The taxpayer or spouse, if filing jointly, could be claimed as a dependent on someone else’s return

Proposed Regulations Address Primary Care and Health Sharing Ministries

The IRS has released proposed regulations addressing the

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critical for them to keep the June 30 rehire date.”

Treasury and SBA, Murthy said, “need to put forth guidance on this IMMEDIATELY so that these borrowers can make a decision. If the point of the law was ‘flexibility’ then keeping the 8-week period should mean the borrower can also keep other aspects related to that period on which they’ve been making decisions all along.”

SBA and Treasury laid out how the modifications enacted Friday will implement the following changes:

• Ease the requirements that 75% of a borrower’s loan proceeds must be used for payroll costs and that 75% of the loan forgiveness amount must have been spent on payroll costs during the 24-week loan forgiveness covered period to 60% for each of these requirements. If a borrower uses less than 60% of the loan amount for payroll costs during the forgiveness covered period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60% of the loan forgiveness amount having been used for payroll costs.

• Provide a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees for borrowers that are unable to return to the same level of business activity the business was operating at before Feb. 15, due to compliance with health and safety requirements or guidance issued between March 1 and Dec. 31 by federal agencies.

• Provide a safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees, to provide protections for borrowers that are both unable to rehire individuals who were employees of the borrower on Feb. 15, and unable to hire similarly qualified employees for unfilled positions by Dec. 31, 2020.

• Increase to five years the maturity of PPP loans that are approved by SBA (based on the date SBA assigns a loan number) on or after June 5.

• Extend the deferral period for borrower payments of principal, interest and fees on PPP loans to the date that SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period).

• In addition, the new rules will confirm that June 30 remains the last date on which a PPP loan application can be approved.

Increase the Rate of Return with Cost-segregation Study

A cost-segregation study is a strategic planning tool that commercial and investment real estate owners can use to increase their cash flow, improve their tax position and improve their overall after-tax return on investment.

treatment of certain medical care arrangements under Section 213 of the Internal Revenue Code.

Specifically, Section 213(d) of the Code allows individuals to take an itemized deduction for expenses for medical care, including insurance.

The proposed regulations address direct primary care (DPC) arrangements and health care sharing ministry (HCSM) memberships, and provide the following guidance:

• Payments for DPC arrangements are expenses for medical care under section 213(d) of the Code. Because these payments are for medical care, an HRA provided by an employer generally may reimburse an employee for DPC arrangement payments.

• Payments for membership in a HCSM are expenses for medical care under section 213(d) of the Code. Because these payments are for medical care, an HRA provided by an employer generally may reimburse an employee for HCSM membership payments.

These proposed regulations are in direct response to Executive Order 13877, which directed the Secretary of the Treasury to “propose regulations to treat expenses related to certain types of arrangements as eligible medical expenses.”

Latest PPP Loan Bill Has Not Reduced Confusion

By Melanie Waddell

The unending confusion surrounding the Paycheck Protection Program continues.

The Paycheck Protection Program Flexibility Act that passed the Senate and was signed into law by President Donald Trump the same day is intended to provide businesses with more time and flexibility to keep their employees on the payroll.

While SBA, in consultation with Treasury, will promptly issue rules and guidance, a modified borrower application form, and a modified loan forgiveness application implementing the new legislative amendments to the PPP, Veena Murthy, a principal at Crowe LLP in Washington, says immediate guidance is needed in one area.

In a Monday comment shared with ThinkAdvisor, Murthy, who joined Crowe in January from the Joint Committee on Taxation, where she was legislation counsel and advised the House Ways and Means and Senate Finance committees on tax policy including the 2017 tax reform and the Secure Act, explained that the changes to the PPP as part of this new law “allow existing borrowers to keep the 8-week period for their loan, rather than the law’s change to a 24-week period.”

However, she continued, “it doesn’t clarify that existing borrowers can keep the June 30 end date for the rehire safe harbor, rather than the law’s change to Dec. 31. There are many borrowers who want to keep the 8-week period and it’s

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$250,000 in taxes, or 5% of the purchase price.

Now is a good time to evaluate all your real estate assets. A cost-segregation study does not have to occur in the year of the acquisition. The study could be performed on a property placed in service in a prior year where a tax return has already been filed. This is known as a look-back study.

A look-back study allows you to claim a catch-up depreciation tax deduction. The catch-up, taken in a single year, is equal to the difference between what was taken a depreciation and what could have been taken as depreciation if a cost-segregation study had been performed. The Internal Revenue Service allows taxpayers to use a cost-segregation study to adjust depreciation on properties placed in service as far back as Jan. 1, 1987.

There are drawbacks to the use of a cost-segregation study. On disposition, any asset that is converted to personal property will not qualify for 1031 exchange and may be subject to tax at the taxpayer’s ordinary income tax rate. In addition, all cost recovery that is taken is subject to recapture.

Almost all taxpayers who plan to hold their commercial and investment real estate over the long run can benefit from a cost-segregation study. A cost-benefit analysis of the study should be completed by a competent professional along with a comprehensive review of the individual tax situation with a tax adviser.

As you consider acquiring commercial or investment real estate, both short- and long-term goals should be considered; however, always start your analysis with an exit strategy. Cost segregation typically is beneficial over the long term.

Cost segregation can reduce the owner’s income tax liability, increase the property’s cash flow and enhance the after-tax internal rate of return that the property generates. To help with the analysis, investors should engage qualified professionals with expertise in this to help them decide if the benefits will outweigh the costs.

Editor's Note: CSSI and Eric Christensen are available to help you and your clients with a cost-free, no obligation analysis of your client's depreciation schedule to see if cost segregation can help. No better time to help those financially distressed clients. Go to the Sponsor's page to find CSSI.

Considering an Early Retirement Withdrawal? CARES Act Rules and What You Should Know.

By Hector Ortiz and Erin Scheithe If you’re out of work and need income, you might be considering withdrawing from your retirement savings. Normally, if you withdraw money from traditional Individual Retirement Accounts (IRA) and employer-provided accounts before reaching age 59 ½, you have to pay a 10 percent early withdrawal penalty.

Joseph Larkin, CCIM, MCRSenior associate, Marcus & Millichap

These cost allocation studies assess a taxpayer’s real property assets and identify a portion of those assets that can be treated as personal property. By segregating personal property from the real property, the study reassigns costs that would have been depreciated over a 27.5-year or a 39-year period to asset groups that have a shorter cost recovery life. Once this is done, the accelerated cost recovery may, under certain circumstances, be expensed immediately.

On average, 20% to 35% of a real estate investment may be reclassified into tax class lives of five, seven or 15 years. This means much larger tax deductions for cost recovery are available in the early years of the investment than otherwise would be available with straight line depreciation over 27.5 for residential or 39 years for nonresidential. This can result in a substantially lower tax liability and an increase in after-tax cash flow and return.

Recent tax law changes made two simple modifications to bonus depreciation that will make cost-segregation studies more valuable to long-term ownership of commercial and investment real estate. Real estate that has been placed in service after Sept. 27, 2017, is eligible for 100% bonus depreciation treatment through tax year 2022.

Bonus depreciation is a tax incentive that allows individuals and businesses to immediately deduct a certain percentage of their asset costs the first year they are placed in service rather than deducting them over the “useful life” of that asset. This bonus depreciation, which also is referred to as “additional first-year depreciation deduction,” allows real estate investors to increase their tax deductions, thus increasing their after-tax return.

Any assets that are reclassified as personal property will be eligible for bonus depreciation and can be immediately expensed in the first year. This means that an investor acquiring an investment property and performing a cost-segregation study may have a lower initial investment because of the tax savings during the year of acquisition.

Consider the following example: A taxpayer purchases a building for $5 million. After performing a cost-segregation study, the study reclassified 20% of the acquisition cost to be personal property. By assigning these assets a shorter depreciable life, the taxpayer could apply bonus depreciation and write off $1 million of the $5 million purchase price in year one. A taxpayer in a 25% marginal tax bracket would save

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Furthermore, withdrawals from your current employer-provided plans are limited to an amount needed to meet a limited set of approved hardships, like avoiding foreclosure, home repairs after a disaster, or medical expenses.

If you’ve experienced hardship as a result of the pandemic, temporary changes to the rules under the CARES Act may give you more flexibility to make a withdrawal from tax-deferred retirement accounts during 2020.

Please note that this blog discusses withdrawals from retirement plans—not retirement plan loans. You may want to spend some time weighing the risks and benefits to withdrawing money versus taking a loan.

What tax-deferred accounts are affected by the changes?

• a traditional IRA

• an employer-provided retirement plan such as a 401(k) or 403(b) or other types of defined contribution plans.

Please note that employers and plan sponsors have to opt in by agreeing to follow the CARES Act provisions. Many employers are not offering the option.

How do I qualify for the exemption?

• You, your spouse, or dependent was diagnosed with COVID-19 by a CDC-approved test , OR

• You experienced adverse financial consequences as a result of certain COVID-19-related conditions, such as quarantine, lay off, furlough, reduction in hours, the closing or reduction of your business, an inability to work due to lack of childcare, or other factors identified by the Department of Treasury .

A coronavirus-related distribution is one that meets this criteria and is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020.

How much can you withdraw without penalty?

You are allowed withdrawals of up to $100,000 per person taken in 2020 to be exempt from the 10 percent penalty. If you have more than $100,000 in one of these retirement accounts, note that it is $100,000 per person and not per account. You can’t take out more than $100,000 total from all of your accounts. Withdrawals from an employer-based account are only possible if the employer agrees to this option under the CARES Act.

Please note that the CARES Act eliminates the 20 percent automatic withholding that is used as an advance payment on the taxes that you may owe on employer-provided plans like your 401(k). This 20 percent withholding is not a requirement when you cash out or withdraw from a traditional IRA plan. So, you may not want to spend the full amount you withdraw because you might owe some of that money in taxes later.

Will the full balance be available to you?

If you are withdrawing from an employer-based account and are relatively new to your job and are not considered fully-vested for retirement purposes, the portion of the funds that were contributed by your employer may not be available to you. Even if you are fully vested, your employer may not allow you to access that portion of your account. Remember, you can’t take out more than $100,000 total.

How long will it take to get the money you withdrew from your accounts?

Regardless of how much you can access, you should know that withdrawing money from a retirement account is not as simple as transferring money from a savings to a checking account. The process could take several weeks. If you need the money for something time-sensitive, give yourself at least a two-week buffer in case paperwork gets delayed or is lost. Many companies are struggling to provide customer support via phone or online, and their ability to handle transactions may be limited as well. Talk to your plan provider or administrator about the steps and ask for an estimated timeline.

Is it better to withdraw from my retirement account now, or let it grow?

You may be withdrawing from a fund that has lost value during the COVID-19 pandemic. When you withdraw money from an investment portfolio in a “low” market, you are limiting its ability to grow and regain its value when the market rebounds. A $100,000 withdrawal today, at a growth rate of 5 percent, would grow to about $160,000 in 10 years without any additional contributions.

Possible tax consequences and ways to deal with them

There are possible tax consequences and different ways to deal with them. While the Act protects you from the 10 percent early distribution penalty, it does not exempt the withdrawn amount from taxes. The amount will be added to your annual income and taxed as such. If you don’t ask to have a percentage of the amount set aside for taxes when you withdraw, you could end up owing a lot when you file your 2020 taxes. The CARES Act distributes the tax burden over a period of up to three tax years, unless you choose not to, and lets you recontribute some or all the funds that you withdrew by the third year. You may need to hire a tax professional to help you file.

Watch out for fraud

Be aware that you may be targeted by scammers that will promise to get back what you have lost in your accounts or offer extraordinary profits during these times. They may claim that there are no risks and high returns. These offers are likely scams. Don’t let fraudsters steal your hard-earned money and savings you’ve built over the years. Always check the background of any investment professional to be sure you’re not dealing with a scammer.

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COVID-19. Under the CARES Act, the income attributable to a COVID-19 distribution will be taxable over 3 years (unless the taxpayer elects otherwise). Alternatively, the taxpayer may recontribute the distributed amount into his or her retirement account within the three-year period without regard to the cap on retirement contributions, and the amount recontributed will not be treated as taxable income to the taxpayer. In addition, the CARES Act also increases the maximum amount that an individual affected by COVID-19 may borrow from a qualified plan from $50,000 to $100,000.

Tax-Free Employer Repayment of Employee Student Loans

The CARES Act permits employer’s to make tax-free payments of up to $5,250 on employees’ student loan debt if made after the enactment of the CARES Act and before January 1, 2021. Qualifying payments include student loans as well as other educational assistance, including tuition, fees and books.

Other Tax-Related Relief

In addition to the incentives under the CARES Act, the Treasury and Internal Revenue Service have extended the due dates for the first estimated tax payments and the April 15 filing date for 2019 tax returns to July 15, 2020. Extensions were also granted for deadlines for like-kind exchanges and qualified opportunity zone investments occurring on or after April 1, 2020, and before July 15, 2020. The IRS also announced that a variety of collection activities, including liens and levies will be suspended through July 15, 2020.

As can be seen, the CARES Act establishes a number of meaningful changes to current tax laws aimed at making it easier for individuals to access cash and reduce tax liability. Additional legislation increasing the amounts available under the CARES Act Paycheck Protection Program has already passed and there is continued discussion of additional relief packages, including additional tax-based stimulus and incentives.

Kyle Day is a partner with Lane & Waterman LLP and is admitted to practice law in Iowa and Illinois. He maintains a business, tax and transactional practice, including tax planning, compliance, business and entity formation and structuring, mergers and acquisition, and estate planning. Kyle can be reached at kday@l-wlaw.com

This article is designed and intended for general information purposes and should not be construed or relied upon as legal advice. Your individual situation will determine what is right for you, and you should consult an attorney if specific legal information is desired.

Social Security Unveils Redesigned Retirement Benefits Portal at Socialsecurity.gov

The Social Security Administration announced the first of several steps the agency is taking to improve the public’s experience on its website. The newly redesigned retirement benefits portal, at www.socialsecurity.gov/benefits/retirement,

CARES Act is Not Short on Individual Income Tax Relief

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. It is intended to stimulate the economy following continued setbacks due to the new coronavirus pandemic. The most newsworthy provisions of the CARES Act relate to the relief granted to small businesses (principally, those businesses with less than 500 employees), but the CARES Act extends tax incentives beyond those businesses to individual taxpayers. Those tax incentives are highlighted in this summary.

Recovery Rebate Payments

Under the CARES Act, individual taxpayers will receive stimulus payments of $1,200 ($2,400 for married taxpayers filing jointly), plus $500 per qualifying child. These “recovery rebates” are designed as refundable tax credits so the payments will not be taxable income to the recipients. The payments, which are estimated to reach $507 billion in aggregate, are reduced for individuals with adjusted gross incomes (AGIs) of $75,000 or more ($112,500 for a head of household; $150,000 for married filing jointly).

Charitable Contribution Deductions

In a previous Insight, we explored how increased standard deduction amounts under the Tax Cuts and Jobs Act (TCJA) of 2017 (for 2019, $12,400 for individuals; $24,800 for married filing jointly) have resulted in tax planning to maximize the year-to-year tax benefits associated with itemized deductions, including charitable contributions, mortgage interest and state and local taxes. To this end, the CARES Act enhances a taxpayer’s ability to benefit from charitable contribution deductions post-TCJA. First, the CARES Act creates a permanent “above-the-line” charitable contribution deduction up to $300 of cash contributions to certain 501(c)(3) public charities (excluding private foundations, supporting organizations and donor advised funds). As an “above-the-line” deduction (i.e. reduction to arrive at a taxpayer’s AGI), this benefit is available even if the taxpayer elects to take the standard deduction. Second, the CARES Act temporarily suspends the 50% AGI limitation for charitable contributions so that taxpayers can receive a charitable contribution deduction for up to 100% of their 2020 AGI (again, excluding contributions to private foundations, supporting organizations and donor advised funds).

Distributions and Loans from Retirement Accounts

Generally, if a taxpayer takes an early distribution (before age 59 ½) from a retirement account (i.e., individual retirement account (IRA) or 401k retirement plan), the taxpayer must pay income tax on the withdrawal plus a 10% penalty. The CARES Act creates an exemption from the 10% penalty on early distributions from qualified retirement accounts during 2020 up to $100,000 if the taxpayer is diagnosed with COVID-19, his or her spouse or dependent is diagnosed with COVID-19, or he or she experiences adverse financial hardship due to

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Make a list of the functions of your office - what are the pros and cons of each function and finally what is the revenue stream from that function.

Can you give up the functions where the "con" overwhelms the "pro" and loose the annual income?

Can you farm out the bookkeeping and payroll services reducing staff and overhead and keep the net revenue after cost.

Can you concentrate on quality staff, reducing net revenue but making the right decision for your practice.

Do you reach out to colleagues to give your their experience and best advise? Do you reach out to staff members who have ideas about how the business could provide better service, increase revenues and grow?

Do you specialize in what you do best or do you offer a variety of services hoping to attract as many clients as possible?

Do what you do best - you've been selling your advice to clients for years - now take it! The price is right.

Question of the Month

Taxpayers e-filed Return with Refund, Not Received. What to Do?

Numerous questions from members who had clients whose tax returns for 2019 were e-filed and acknowledged but no refund received. Many of these are several months old.

IRS web site "Where's My Refund" is no help and no one to speak with at IRS about the missing refund due to the COVID 19 shutdown of the Internal Revenue Service.

Form 911, Request for Taxpayer Advocate Service Assistance, with your Power of Attorney, Form 2848.

will help millions of people prepare for and apply for retirement.

“We are working hard to continue improving our website to provide people with clear, helpful information and easy access to our online services,” said Andrew Saul, Commissioner of Social Security. “Our new retirement portal is more user-friendly and easier to navigate, whether someone is ready to learn about, apply for, or manage their retirement benefits.”

The redesigned portal will make it easier for people to find and read about Social Security retirement benefits, with fewer pages and condensed, rewritten, and clearer information. The portal also is optimized for mobile devices so people can learn and do what they want from wherever they want, and the portal now includes the ability to subscribe to receive retirement information and updates.

Click on www.socialsecurity.gov/benefits/retirement to find out how to Learn, Apply, and Manage retirement benefits, and learn how to create a personal my Social Security account online.

More improvements to Social Security’s website are planned for later in 2020 as the agency seeks to continuously improve the public experience at www.socialsecurity.gov.

Practice ManagementGrow Your Practice - Grow Your Value

How many tax professionals does it take to . . . . . , the general consensus is that it doesn't matter how many tax professionals are gathered, we all have our own experiences and stories.

How do I find new clients?

How do I hire competent staff?

Do I need a web site?

Should I use social media?

Should I cultivate new clients or offer expanded services to current clients?

To say that times are changing is an understatement to say the least. No longer do we simply need to love numbers, or be required to be somewhat likable, we must be on the cutting edge of what is happening to our industry.

No one wants to go back to preparing returns by hand, in fact, never say that to an IRS person they have no clue what you are talking about, but we fear the innovative changes of our software companies, fearful that we won't be able to adapt to change.

What is it you want to do? What is it that you like to do? What do you enjoy?

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• Texas• Washington• Wyoming

7 States That Do Fully Tax Military Retirement Pay

The following states have no specific state income tax exemption for military retirement pay:

• California• Montana• New Mexico (there is a low- and middle-income tax exemption. The max exemption is $2,500)• Rhode Island• Utah (65 and older may claim a non-refundable tax credit of up to $450)• Vermont• Virginia

21 States That Don’t Tax Military Retirement Pay (but do have state personal income tax)

• Alabama• Arkansas• Connecticut• Hawaii• Illinois• Iowa• Kansas• Louisiana• Maine• Massachusetts• Michigan• Minnesota• Mississippi• Missouri• New Jersey• New York• North Dakota (as of 2019)• Ohio• Pennsylvania• West Virginia (as of 2018)• Wisconsin

For these states military retirees are encouraged to go to www.dfas.mil/retiredmilitary to change their income tax withholding to zero.

13 States With “Special Provisions” Or Other Consideration For Military Retirement Pay

• Arizona – Military retirement pay may be excluded from state taxation up to $2,500.• Colorado – Depending on age, up to $24,000 of military retirement pay may be exempt from state taxes.• Delaware – Taxpayers up to the age of 60 may exclude up to $2,000 of military retirement pay, military retirees aged 60 or older exclude up to $12,500.• District of Colombia – Military retirement pay may be excluded from state taxation up to $3,000 for individuals 62

Remember, the Taxpayer Advocate is required to take your taxpayer's case if it falls into one of two categories:

1. A systemic issue, meaning something is so wrong at the IRS procedurally that the Advocate is needed to straighten it out OR

2. The issue with the IRS is causing an economic harm to your taxpayer.

You can call the Taxpayer Advocate toll-free at 877-777-4778 or go to IRS.GOV and request Local Taxpayer Advocate. The map of the United States will appear and all offices of the Local Taxpayer Advocate will appear when you click on the state, their address, phone and FAX number.

The response time will be dependent upon the case load but these Advocates are trained to find your taxpayers refund and expedite it.

Form 911 is the key.

Military News

States that Do & Do Not Tax Military Retirement Pay

2020 list of all 50 states that exempt (or don’t) all or a portion of military retirement pay. The laws differ depending on which of the 50 states you live in and some state tax laws are more complex than others. Depending on the state you may pay no income tax whatsoever, or you may find your military retirement pay is exempt from taxation up to a certain dollar amount.

Quick math: 9 states don’t have a personal income tax, 7 states fully tax military retirement pay, 21 states don’t tax retirement pay and 13 tax a portion.

9 States That Don’t Tax Personal Income

The following states don’t require military members to pay state income tax on military retirement pay because there is simply no state income tax collected:

• Alaska• Florida• Nevada• New Hampshire (dividend and interest taxes only)• South Dakota• Tennessee (dividend and interest taxes only)

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or older.• Georgia – Georgia has a provision for any retirement income including military retirement pay. Taxpayers who are 62 or older, or permanently and totally disabled regardless of age, may be eligible for a retirement income adjustment on their Georgia tax return. Up to $35,000 ages 62-64 and $65,000 for 65 and older.• Idaho – Retirement benefits to a retired member of the military 65 or older, or disabled and age 62 or older are excluded from state taxes. Such deductions must be reduced by retirement benefits paid under the Federal Social Security Act or the Tier 1 Federal Railroad Retirement Act. The total maximum deductions vary each year.• Indiana – Military retirees and surviving spouses may deduct $6,250 plus 25% of the amount of the benefits in excess of $6,250 in the taxable year 2019. The percentage will increase to 50% in 2020, 75% in 2021 and 100% for taxable years beginning after 2021. House Act No. 1010 was signed into law in August, 2019.• Kentucky – All military retirement pay is exempt from state income tax for those who retired prior to 1997. For those who retired after 1997, military retirement pay is subject to state tax when the pay exceeds $41,110.• Maryland – Military retirees don’t pay state income taxes on the first $5,000 of their retirement income. Those over age 65, or who are totally disabled, or who have a spouse who is totally disabled, receive additional state income tax breaks which may vary from year to year.• Nebraska – Retirees must choose (within two years of the retirement date) a seven-year exemption option of 40% or a lifetime exemption option of 15% starting at age 67.• North Carolina – Military retirement pay may not be taxed at all if it meets certain requirements including if the veteran was “vested in the retirement system” for five years as of August 12, 1989. Otherwise, tax exemptions may be applicable up to $4,000 for single returns and $8,000 for joint returns.• Oklahoma – Military retirement pay is exempt either up to 75% or $10,000, whichever is greater, but cannot exceed federal adjusted gross income.• Oregon – Military retirees may qualify for a “federal pension subtraction”. Those considered “special-case” Oregon residents will have their military retirement pay taxed as regular income.• South Carolina – Military retirees with a minimum of 20 years of active duty may exempt up to $3,000 until age 65, after which an exemption of $10,000 applies.Tax codes vary from state to state, and tax laws are subject to change due to a variety of factors. Always consult with a tax professional to learn the most recent updates to state tax code, especially if there are changes to your tax bracket, income status, or benefits.

Estate and Trust NewsTax Strategies to Consider When Planning Your Estate

Jennifer Solak

“More tax, please?” Said no one ever. Although death and taxes are two things we can’t avoid, you can employ tactics to divert more of your hard-earned savings to your family instead of Uncle Sam. These strategies arise in the context of estate tax, capital gains tax, and income tax.

1. Estate Tax: Start gifting, elect portability, or lock in the exemption now.

Currently, the estate tax exemption is $11.58 million, so each person has an $11.58 million “coupon” they can use to pass assets free of tax, before incurring the 40% tax penalty for assets that exceed the exemption. Unfortunately, there aren’t many people with this problem, but no one knows when they will pass and what the exemption will be then. For example, the exemption used to be $600,000, and on January 1, 2026, it is slated to decrease again. Needless to say, it’s important to be mindful of the estate tax exemption, so that you can use it.Gift Now. In 2020, you can give away $15,000 tax-free to as many people you’d like. (Do you want my address?) Importantly, this amount does not count against your estate tax exemption. If you have sufficient assets to support yourself, gift now so you don’t get caught with a taxable estate later and are unable to reduce it quickly.

Elect Portability. Portability is a concept that allows married couples (who are both U.S. citizens) to essentially “inherit” each other’s estate tax exemption. But the survivor does not automatically inherit the unused exemption. It must be claimed on a tax form. Even if you think you may not need the double exemption, elect for portability to preserve the potential to pass money tax-free later.

Lock in the Exemption Now. You don’t have to wait to die to use your estate tax exemption. Should you have an asset, like a family business, that you expect to appreciate significantly, consider gifting it now to allow your family tax-free appreciation in the future.

2. Capital Gains Tax: Take advantage of not only one, but two step-ups in basis.

Typically, you’ll be taxed on the gain between the amount National Center for Professional Education

Fellowship

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at which you acquired an asset and what it sells for. If you have an asset that has appreciated significantly since its purchase, don’t sell or donate before you pass. By allowing your heirs to inherit the property, they will receive the asset at its current fair market value (a “stepped-up” basis), and eliminate the capital gains tax. If that asset is community property, you can also include it in the surviving spouse’s estate and receive a second step-up when he or she passes. (Use caution with the second step-up, however, and consider whether including that asset in the survivor’s estate might push the estate over the estate tax threshold).

3. Income Tax: Take more than the Required Minimum Distribution (RMD) now.

With the passing of the SECURE Act at the end of last year, IRA beneficiaries can no longer “stretch” their inherited IRAs over their lifetime. Instead, the beneficiary now needs to withdraw all inherited IRA funds within ten years. Should a beneficiary be in their prime earning years, this inherited money could increase their income tax liability and reduce the amount of benefits received. Conversely, if the IRA owner has no earned income when he or she withdraws RMDs, it may make sense to withdraw more than the required amount and divert those funds to Roth IRAs, insurance, or other assets that can be inherited without incurring any income tax liability.

The information in this column, which was sponsored by Solak Legal as part of The Leader Expert Series, is intended to provide a general understanding of the law and not legal advice. Readers with legal questions should consult attorneys for advice on their particular circumstances. Jennifer Solak provides legal advice for families and businesses and may be contacted at jennifer@solaklegal.com or 713-588-5744.

Temporary Safe Harbor Provided for Trusts Holding Rental Real Estate

Rev Proc 2020-34, 2020-26 IRB

In a Revenue Procedure, the IRS has provided a temporary safe harbor to certain arrangements organized as trusts that hold rental real property, and which are, or have tenants who are, experiencing financial hardship as a result of COVID-19. The IRS will allow these trusts to make certain modifications to their mortgage loans and their lease agreements and to accept additional cash contributions without jeopardizing their tax status as trusts.

Under Reg § 301.7701-4(c), an arrangement with a single class of ownership interests, representing undivided beneficial interest in the trust assets, is classified as a trust if there is no power under the trust agreement to vary the investment of the beneficiaries (“power to vary”).

Rev Rul 2004-86, 2004-2 CB 191, holds that a Delaware statutory trust (Trust) formed to hold real property subject to a lease was an arrangement classified as a trust for Federal tax purposes under Reg §301.7701-4(c). The ruling states

that Trust would have been treated as a business entity, not a trust, if Trust’s trustee had a power under the trust agreement to, among other things, renegotiate the lease with the tenant, to enter into leases with other tenants, or to renegotiate or refinance the mortgage loan whose proceeds were used to purchase the real estate.

In Rev Proc 2020-26, 2020-18 IRB 753, the IRS provided safe harbors for determining the Federal income tax status of certain securitization vehicles that hold mortgage loans. Under the safe harbors, certain modifications of mortgage loans in connection with forbearance programs described in that guidance are not treated as manifesting a power to vary.

Revenue Procedure 2020-34 safe harbor. After issuing Rev Proc 2020-26, the IRS received comments addressing arrangements organized as trusts under Reg §301.7701-4(c) and Rev Rul 2004-86, that hold rental real property. The commentators reported that many of these arrangements and their tenants are experiencing financial hardship due, directly or indirectly, to the COVID-19 emergency.

As a result of receiving these comments, the Revenue Procedure has provided a safe harbor under which the actions described in its Sec. 6 (discussed below) are not manifestations of a power to vary for purposes of determining whether the arrangement is treated as a trust under Reg §301-7701-4(c) and Rev Proc 2004-86. (Rev Proc 2020-34, Sec. 7)The safe harbor allows these arrangements to make certain modifications to their mortgage loans and their lease agreements and to accept additional cash contributions without jeopardizing their tax status as trusts.

Under the procedure, the actions described below are not manifestations of a “power to vary” that violates Reg § 301.7701-4(c):

1. Modification of one or more mortgage loans that secure the trust’s real property in a CARES Act forbearance or a forbearance that the trust requested, or agreed to, between March 27, 2020, and December 31, 2020, and that were granted as a result of the trust experiencing a financial hardship due to the COVID-10 emergency. (Rev Proc 2020-34, Sec. 6.02)

2. Modification of one or more real property leases. The lease must have been entered into by the trust on or before March 13, 2020, and the modifications must have been requested and agreed to on or after March 27, 2020 and on or before December 31, 2020. The reason for the lease modification must be (a) to coordinate the lease cash flows with the cash flows that result from one or more transaction described in Sec. 6.02 or (b) to defer or waive one or more tenants’ rental payments for any period between March 27, 2020 and December 31, 2020 because the tenants are experiencing a financial hardship due to the COVID-19 emergency. (Rev Proc 2020-34, Sec. 6.03)

3. Accepting cash contributions that were made between March 27, 2020, and December 31, 2020, as a result

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‘A gut punch for businesses’

“Treasury’s guidance barring deductions for expenses paid by PPP loans is a gut punch for businesses struggling to stay afloat,” Sen. Ron Wyden (D-Ore.) said in a statement. “It defies common sense for Treasury to provide help on the front end, but then take it away on the back end.” Wyden is the ranking Democrat on the Senate Finance Committee. Finance Chairman Chuck Grassley (R-Iowa) also supports Cornyn’s bill.

“From my boss’ perspective, his bill clarifies it so there’s no confusion at all,” Siracuse said. “The tax writing committees understood it, the Joint Committee on Taxation that does all the scoring of any tax legislation, they had the same understanding. So, it seems that Treasury is sort of the odd man out.”

Cornyn hopes the bill can pass on its own through unanimous consent. If not, it could be attached to the next coronavirus recovery legislative package in late July or early August – in plenty of time in either case to fully deduct 2020 business expenses.

Siracuse addressed other measures that might also be included, such as an expansion of the Employee Retention Tax Credit or the RESTART Act, which would create a new lending program. HFA’s Government Relations Action Team met via Zoom last month with U.S. Sen. Todd Young (R-Ind.), the primary co-sponsor of the bipartisan RESTART Act, and fully supports the bill.

A survey of its members by the National Federation of Independent Business found that 47 percent of more than 600 respondents said they anticipate they will need additional government assistance over the next 12 months. The HFA aims to make sure that Congress listens to business concerns, especially as Covid-19 continues to spread rapidly in many states.The HFA urges furniture retailers to ask their senators to support S. 3612, the Small Business Expense Protection Act of 2020, and the RESTART Act. Contact information can be found here.

Doug Clark

Doug is content manager and government relations staff member for the Home Furnishings Association.

of the trust experiencing financial hardship due to the COVID-19 emergency. However, the contribution must be needed to increase permitted trust reserves, to maintain trust property, to fulfill obligations under mortgage loans, or to fulfill obligations under real property leases. (Rev Proc 2020-34, Sec. 6.04)

The revenue procedure also provides that a cash contribution from one or more new trust interest holders to acquire a trust interest or a non-pro rata cash contribution from one or more current trust interest holders must be treated as a purchase and sale under Code Sec. 1001 of a portion of each non-contributing (or lesser contributing) trust interest holder’s proportionate interest in the trust’s assets.

News from Capital Hill

HFA Pushes Against PPP Tax ‘Gut Punch’

A bipartisan bill pending in the U.S. Senate would end “confusion” about tax liabilities related to Paycheck Protection Program loans, Home Furnishings Association members were told Wednesday.

HFA’s Government Relations Action Team held a conference call with Andrew Siracuse, tax counsel for Sen. John Cornyn (R-Texas). Cornyn introduced the Small Business Expense Protection Act of 2020 last month. It has 23 co-sponsors from both parties.

Cornyn’s bill responded to a ruling by the Internal Revenue Service that tax deductions can’t be claimed for ordinary business expenses if those expenses were paid with forgiven portions of PPP loans. That might include, for example, some payroll costs or mortgage interest.

The IRS interpretation was wrong

The HFA opposes that interpretation – and so do Sen. Cornyn and his co-sponsors.

“My boss, Sen. Cornyn, thinks the IRS got the issue incorrect,” Siracuse said. “It was intended by Congress to allow folks to continue to deduct these expenses that were used with forgiven PPP loans.”

Siracuse didn’t dispute the idea that, under normal circumstances, the deduction might not be granted. The IRS may regard it as “double-dipping” if businesses claimed expenses that were not incurred.

But, said Siracuse, “Sen. Cornyn disagrees entirely with that characterization. These are unusual times, to say the least, and the last thing we should do is hit folks with a hidden tax.“The tax was hidden in that it wasn’t spelled out in the CARES Act, which created the PPP. Congress didn’t provide loan forgiveness only to let the IRS claw back some of the money.

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suggests many of the large companies likely to take advantage of the break may not need it.

"This form of cashing out could strip the government of revenue in the future to give money away to business owners today. That's very dangerous," said Steve Rosenthal, a policy analyst at the Tax Policy Center, a nonpartisan think tank. "This is another overreach by big businesses to grab tax dollars at a time when small businesses need assistance."

Some experts said allowing companies to claim the federal credits now would ensure they still have an impact at a time when, due to the downturn, fewer firms have substantial tax liability to offset. Those tax credits incentivize behaviors lawmakers want to encourage, such as research and development and energy investments.

Corporate income tax receipts have dropped from $113 billion at this point last year to $86 billion this year, the Treasury Department said Wednesday, a decrease of nearly 25%. That number probably understates the extent of the drop because it includes several months in this fiscal year before the coronavirus started slowing the economy, said Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget, a nonpartisan think tank.

"This would allow credits to continue to work as intended during the pandemic when there is not much taxable income. That is good," said Kyle Pomerleau, a tax policy expert at the American Enterprise Institute, a right-leaning think tank.

Caroline Harris, vice president of tax policy at the U.S. Chamber of Commerce, added in a statement: "The Chamber strongly supports additional tax relief, such as the monetization of general business credits, that provides businesses much needed liquidity so they can remain operational and maintain payrolls."

A House Democratic aide said in a statement that "providing businesses and investors with early access to tax credits does not seem like the best use of federal dollars."

President Trump Announces Tax Credit Plan for Visiting Restaurants and Traveling in the U.S., Reports Bambridge Accountants New York

The Explore America Tax Credit would provide tax relief, proposed at $4,000 per household, for Americans to go back to restaurants and domestic travel, reports Bambridge Accountants New York.

In remarks at a recent roundtable at The White House with leaders of the restaurant industry, President Trump announced plans to create a tax credit for Americans to use for domestic travel and to visit restaurants.

The proposed tax credit has been welcomed by the restaurant and travel industries.

Senators Weigh Letting Firms Accelerate Tax Break

By Jeff Stein

Some members of the Senate Finance Committee are studying a proposal that would allow corporations to claim a bevy of federal tax credits in 2020 that they would otherwise be ineligible to receive until future years, according to four people with knowledge of internal deliberations.

Powerful members of Washington's business lobby, including the National Association of Manufacturers and the U.S. Chamber of Commerce, are asking lawmakers to include the tax change in the next congressional legislation being taken up to combat the virus, these people said.

Under current law, corporations are generally not allowed to claim federal tax credits if the credits exceed their overall tax liability, meaning they cannot receive more from the government than they pay in. If corporations cannot claim their federal tax credits, they can roll them into future years.

The current proposal being discussed by several Republicans on the Senate Finance Committee would void that limit, allowing firms to "cash out" all their credits this year. The sources spoke on condition of anonymity to discuss internal deliberations.

The emerging tax proposal comes amid intensifying jockeying among special interest groups and congressional lawmakers over the next round of congressional stimulus, which could be as large as $1 trillion.

Three lobbyists said the plan has emerged as one of the top priorities for American business groups in the next congressional package.

The White House, congressional Republicans and business groups have also pushed aggressively for a "liability shield" that would insulate companies from lawsuits from customers or employees who develop covid-19, the disease caused by the novel coronavirus, but Democrats have rejected that proposal as a nonstarter.

Several congressional aides and lobbyists predicted that the tax overhaul was more likely to be approved as part of a broader bipartisan deal. On Wednesday, Treasury Secretary Steven Mnuchin told congressional lawmakers that "small businesses and larger businesses are going to need more help" to weather the downturn.

Congress has already approved multiple tax changes designed to give corporate America access to additional short-term funding, and

Democrats have argued that lawmakers should focus on providing emergency relief to workers and small businesses. Tax experts say it is unclear which sectors would most benefit from the change, but argue the rebound in the stock market

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The Independent Restaurant Coalition said, "We are grateful that President Trump and Congress are taking the concerns of our industry seriously and look forward to working together to ensure our businesses can survive this crisis and our employees can get back to work."

The U.S. Travel Association said, “An ‘Explore America’ tax credit and campaign will do wonders to put America back on the path to prosperity. We applaud the president’s support."

While the Explore America Tax Credit is still being reviewed by Congress and President Trump's administration, the initial proposal is a tax credit of up to 50 percent of a household’s spending on expenses including airfares, car rentals, hotels, theme parks and restaurants.

The tax credit would be up to $4,000 per household and it would apply for eligible expenses in 2020 and 2021.

President Trump has also urged Congress to restore the tax deductions for business-related entertainment and meal expenses. As part of the Tax Cuts and Jobs Act in 2017, deductions for business entertainment expenses were eliminated completely and businesses were limited to claiming 50% of meal expenses.

Following the news of the Explore America Tax Credit, President Trump reiterated his support for the restaurant and entertainment industries during a White House press conference at the Rose Garden, announcing that tax incentives would be coming soon.

People in the Tax News

Matawan Resident Faces Federal Charges, Including Tax Evasion

A resident of Matawan has been charged with tax evasion, corrupt interference with the administration of the internal revenue laws and failure to file federal tax returns, U.S. Attorney Craig Carpenito announced.

Thomas Bertoli, 62, is charged by indictment with three counts of tax evasion, one count of corrupt interference with the administration of the internal revenue laws, and four counts of failure to file tax returns. He will be arraigned at a later date, according to a press release that was issued on June 23.

According to the indictment, Bertoli operated the following businesses: The Doormen Inc.; City Street Associates LLC, (also known as CSA LLC); and Urban Logistics LLC.

Individually and through his companies, Bertoli obtained payments from clients for services provided, including payments from developers and construction firms for expediting services on real estate development and construction

projects, primarily in Jersey City; and payments from political campaigns for political consulting services in New Jersey.

Expediting in the construction industry typically refers to facilitating the acquisition of building permits and other government agency approvals required for the completion of real estate projects.

According to the indictment, Bertoli obtained hundreds of thousands of dollars in gross receipts for calendar years 2009 to 2016. Bertoli had not, as of April 18, 2017, filed federal tax returns or paid any of the taxes due, other than a $5,000 nominal payment in September 2014, for those years, despite receiving substantial gross receipts and having a substantial tax due and owing.

He allegedly concealed and attempted to conceal from the Internal Revenue Service his income and assets through various means; made false and fraudulent statements to the IRS; and used the Urban Logistics bank account for personal expenditures.

Bertoli is charged with evasion of payment of taxes for calendar years 2009 to 2013 and evasion of assessment of taxes for calendar years 2014 and 2015. He is also charged with corrupt interference with the administration of the internal revenue laws and failing to file tax returns for calendar years 2013 to 2016.

Each charge of tax evasion carries a maximum potential penalty of five years in prison and a maximum $250,000 fine.The charge of corrupt interference with the administration of the internal revenue laws carries a maximum potential penalty of three years in prison and a $250,000 fine.

Each charge of failing to file a tax return carries a maximum potential penalty of one year in prison and a $100,000 fine, according to the press release.

Operators of California Charity Plead Guilty to Mail Fraud Conspiracy and Tax Evasion

A California couple pleaded guilty yesterday to conspiring to commit mail fraud and tax evasion, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division and U.S. Attorney Robert S. Brewer, Jr. for the Southern District of California.

According to court documents and statements made in court, married couple Geraldine Hill and Clayton Hill operated On Your Feet (OYF), also known as Family Resource Center, a tax-exempt charitable organization whose stated mission was to provide assistance to low income families and individuals in need. From 2011 through 2016, the Hills fraudulently obtained more than $1.35 million in donated clothing and other items by falsely representing to the donors that the items would be given to needy recipients. In fact, the Hills made charitable donations of only about $13,000, sold the remaining donated items, and used the proceeds to financially enrich themselves and others. To conceal their conduct from the Internal Revenue

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Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division and U.S. Attorney Thomas T. Cullen for the Western District of Virginia.

According to the indictment, Jeffrey Tharpe was the owner and operator of Shearin Construction Inc. (Shearin Construction), an excavating and heavy construction business located in Charlotte County. From 2002 through 2013, Tharpe allegedly caused payroll taxes to be withheld from Shearin Construction’s employees’ wages, but failed to fully pay them over to the IRS. In an attempt to make it appear that Tharpe had no ownership interest in the company or its funds, Tharpe allegedly placed the company and its assets in his wife’s name. When the IRS attempted to collect the outstanding payroll taxes from Tharpe’s wife, Tharpe allegedly caused his wife to transfer her interest in real property to him and then encumbered the property with fake debts to place it beyond the IRS’s reach. The indictment alleges that Tharpe owes more than $940,000 in employment taxes, interest, and penalties.

If convicted, Tharpe faces a maximum sentence of five years in prison for tax evasion, and three years in prison for obstructing the IRS. He also faces a period of supervised release, restitution, and monetary penalties.

An indictment merely alleges that crimes have been committed. The defendant is presumed innocent until proven guilty beyond a reasonable doubt.

Principal Deputy Assistant Attorney General Zuckerman and U.S. Attorney Cullen commended special agents of IRS-Criminal Investigation, who conducted the investigation, and Trial Attorneys Alexander Effendi and William Montague of the Tax Division, who are prosecuting this case.

IRS News

Reminder: IRS Will Be Closing Some P.O. Boxes On July 1; Will Not Forward Checks

In a newsletter to tax professionals, IRS has reminded taxpayers that July 1 marks the closing of several business payment P.O. Boxes (also known as Lockbox addresses), in the Cincinnati and Hartford areas. Payments will be returned to sender. No forwarding service will be offered.

IRS first made this announcement in January 2020.

IRS instructs taxpayers and tax professionals that, to help ensure timely receipt, they should check IRS's Where to File website before mailing tax payments.

Service (IRS), the Hills filed false charitable tax returns for OYF and false personal tax returns that did not report the income they received from their scheme.

“The Hills not only evaded their taxes, but they did so by abusing their company’s tax-exempt charitable status and thereby cheated not only the public fisc but the donors and intended beneficiaries of the donations,” said Principal Deputy Assistant Attorney General Richard E. Zuckerman. “As the guilty pleas make clear, this conduct will not go unpunished.”“I am committed to using the resources of the U.S. Attorney’s Office in the Southern District of California to aggressively pursue fraudsters and tax cheats,” said U.S. Attorney Robert S. Brewer Jr. for the Southern District of California. “The conduct by Geraldine and Clayton Hill is particularly offensive because they used the benefits afforded by the 501(c)(3) status of their charity to defraud donors and conceal their profits. By abusing the generosity of companies and individuals who put their faith in the promises made by the Hills, the defendants threatened to undermine the trust and integrity underpinning charitable giving.”

“Geraldine Hill and Clayton Hill exploited the public trust and charitable giving by using their charity to solicit over $16 million in goods from hardworking businesses and falsely promising to donate those goods to assist low income families and individuals in need,” said Ryan L. Korner, Special Agent in Charge of the IRS Criminal Investigation Division. “Instead, the Hills resold the goods and profited over $1.34 million which they spent on vehicles, vacations, and entertainment, as well as personal expenses for their family members. The Hills concealed their fraud by filing false tax returns on behalf of the charity and failing to report their illicit income to the IRS. Their guilty pleas evidence the hard work of IRS Criminal Investigation Special Agents to bring to justice those that defraud businesses in the name of charity, and who benefit themselves instead of serving those most in need.”

“While fraud is always wrong, the theft of charitable donations that were to be used to help San Diego’s low income families is particularly disheartening,” said Acting FBI Special Agent in Charge Omer Meisel. “This type of fraud and deceit for personal gain simply cannot be tolerated. The FBI is committed to ensuring that white collar predators don’t prevent those less fortunate from receiving all the benefits that generous donors provide to seemingly legitimate non-profit organizations.”

U.S. District Judge Dana M. Sabraw scheduled the sentencing for Aug. 28, 2020. At sentencing, the Hills face a maximum sentence of five years in prison for each mail fraud conspiracy and tax evasion. The Hills also face a period of supervised release, restitution, and monetary penalties.

Virginia Resident Indicted for Employment Tax Evasion and Obstructing the IRS

A federal grand jury in Roanoke, Virginia, returned an indictment today, charging a Virginia resident with evading payment of employment taxes and attempting to obstruct the Internal Revenue Service (IRS), announced Principal Deputy

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Code Sec. 7508A(b) provides that, in the case of a pension or other employee benefit plan, or any sponsor, administrator, participant, beneficiary, or other person with respect to such a plan, affected by a federally declared disaster, the IRS may specify a period of up to one year that may be disregarded in determining the date by which any action is required or permitted to be completed. If the IRS exercises that authority, no plan will be treated as failing to be operated in accordance with its terms solely because the plan disregards any period pursuant to this relief.

On March 13, 2020, the President declared a federal disaster (Emergency Declaration) due to the emerging COVID-19 pandemic. Following the Emergency Declaration, the IRS published guidance utilizing the authority provided under Code Sec. 7508A to postpone certain deadlines in the case of a federally declared disaster.

The IRS has now postponed deadlines for certain specified time-sensitive actions with respect to certain employment taxes, employee benefit plans, exempt organizations, IRAs, HSAs and Coverdell education savings accounts on account of the ongoing COVID-19 pandemic.

Deadlines extended to June 30, 2020. With respect to the remedial amendment period and plan amendment rules for section 403(b) plans, actions that were otherwise required to be performed on or before March 31, 2020, with respect to form defects or plan amendments are postponed to June 30, 2020.

Deadlines extended to July 15, 2020. The following tax deadlines have been extended to July 15, 2020:

…Employers correcting employment tax reporting errors using the interest-free adjustment process.

…Employers correcting employment tax underpayments or overpayments.

…Exempt organizations filing Form 990-N, e-Postcard.

…Exempt organizations commencing a declaratory judgment suit.

…Single employer defined benefit plans applying for a funding waiver.

…Multi-employer defined benefit plans: (1) certifying funded status and giving notice to interested parties of that certification; (2) adopting, and notifying the bargaining parties of the schedules under, a funding improvement or rehabilitation plan; and (3) providing the annual update of a funding improvement plan and its contribution schedules, or rehabilitation plan and its contribution schedules, and filing those updates with their annual return.

…Cooperative and small employer charity (CSEC) plans (1) making contributions required to be made for the plan year; (2) making required quarterly installments; (3) adopting a

IRS Announces Rollover Relief for Required Minimum Distributions from Retirement Accounts that Were Waived Under the CARES Act

The Internal Revenue Service has announced that anyone who already took a required minimum distribution (RMD) in 2020 from certain retirement accounts now has the opportunity to roll those funds back into a retirement account following the CARES Act RMD waiver for 2020.

The 60-day rollover period for any RMDs already taken this year has been extended to Aug. 31, 2020, to give taxpayers time to take advantage of this opportunity.

The IRS described this change in Notice 2020-51, released today. The Notice also answers questions regarding the waiver of RMDs for 2020 under the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act.

The CARES Act enabled any taxpayer with an RMD due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, to skip those RMDs this year. This includes anyone who turned age 70 1/2 in 2019 and would have had to take the first RMD by April 1, 2020. This waiver does not apply to defined-benefit plans.

In addition to the rollover opportunity, an IRA owner or beneficiary who has already received a distribution from an IRA of an amount that would have been an RMD in 2020 can repay the distribution to the IRA by Aug. 31, 2020. The notice provides that this repayment is not subject to the one rollover per 12-month period limitation and the restriction on rollovers for inherited IRAs.

The notice provides two sample amendments that employers may adopt to give plan participants and beneficiaries whose RMDs are waived a choice as to whether or not to receive the waived RMD.

IRS Extends Deadlines for Employment Taxes, Benefit Plans, Etc. Because of COVID-19

Notice 2020-35, 2020-25 IRB

In a Notice, the IRS has postponed deadlines for specified time-sensitive actions with respect to certain employment taxes, employee benefit plans, exempt organizations, Individual Retirement Accounts (IRAs), Health Savings Accounts (HSAs) and Coverdell education savings accounts due to the ongoing COVID-19 pandemic.

Code Sec. 7508A gives the IRS the authority to postpone the time for performing certain acts under the internal revenue laws for a taxpayer determined by the IRS to be affected by a “federally declared disaster.”

Under Code Sec. 7508A(a), a period of up to one year may be disregarded in determining whether the performance of certain acts is timely under the internal revenue laws.

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The IRS has provided participants, beneficiaries, and administrators of qualified retirement plans and other tax-favored retirement arrangements with temporary relief from the physical presence requirement for any participant election: (A) witnessed by a notary public in a state that permits remote notarization; or (B) witnessed by a plan representative using certain safeguards.

Section 2202(a) of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) permits certain individuals to receive up to $100,000 for a coronavirus-related distribution from an eligible retirement plan. A coronavirus-related distribution is defined as any distribution from an eligible retirement plan to a qualified individual made during calendar year 2020. Such a distribution is not subject to the 10% additional tax under Code Sec. 72(t) to the extent it meets the requirements of a coronavirus-related distribution.

Section 2202(b)(1) of the CARES Act provides that for any loan from a qualified employer plan to a qualified individual made during the 180-day period beginning on March 27, 2020, the $50,000 aggregate loan limit in Code Sec. 72(p)(2)(A)(i) is increased to $100,000. In addition, the rule in Code Sec. 72(p)(2)(A)(ii) limiting the aggregate amount of the loans to one-half of the present value of the vested accrued benefit of the employee is increased to 100% of the employee’s vested accrued benefit under the plan.

Reg §1.401(a)-21 sets forth standards for the use of an electronic medium to provide applicable notices to recipients or to make participant elections with respect to a retirement plan, an employee benefit arrangement, or an individual retirement plan.

Reg §1.401(a)-21(d)(6)(i) provides that, in the case of a participant election that is required to be witnessed by a plan representative or a notary public, the signature of the individual making the participant election must be witnessed in the physical presence of a plan representative or a notary public (“physical presence requirement”).

Reg §1.401(a)-21(e)(6) defines a participant election as any consent, election, request, agreement, or similar communication made by or from a participant, beneficiary, alternate payee, or an individual entitled to benefits under a retirement plan, employee benefit arrangement, or individual retirement plan.

For calendar year 2020, the IRS has provided temporary relief from the physical presence requirement in Reg §1.401(a)-21(d)(6) for any participant election: (A) witnessed by a notary public in a state that permits remote notarization, or (B) witnessed by a plan representative using certain safeguards.

According to the Notice, this relief accommodates local shutdowns and social distancing practices and is intended to facilitate the payment of coronavirus-related distributions and plan loans to qualified individuals, permitted by the CARES Act.

funding restoration plan; and (4) certifying funded status.

…Employee benefit plans filing Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, and paying the associated excise tax.

In addition, the period beginning on March 30, 2020, and ending on July 15, 2020, will be disregarded in the calculation of any interest or penalty for failure to file the Form 5330 or to pay the excise tax postponed by the notice. Interest and penalties with respect to such postponed filing and payment obligations will begin to accrue on July 16, 2020.

Deadlines extended to July 31, 2020. Defined benefit plans have until July 31, 2020: (1) to adopt a pre-approved defined benefit plan that was approved based on the 2012 Cumulative List; (2) to submit a determination letter application under the second six-year remedial amendment cycle; and (3) to take actions that are otherwise required to be performed regarding disqualifying provisions in a plan during the remedial amendment period that would otherwise have ended on April 30, 2020.

Deadlines extended to August 31, 2020. The due date for filing and furnishing Form 5498, IRA Contribution Information, Form 5498-ESA, Coverdell ESA Contribution Information, and the Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, is postponed to August 31, 2020.

In addition, the period beginning on the original due date of those forms and ending on August 31, 2020, will be disregarded in the calculation of any penalty for failure to file those forms. Penalties with respect to such a postponed filing will begin to accrue on September 1, 2020.

The IRS has also provided a temporary waiver of the requirement that Certified Professional Employer Organizations (CPEOs) file certain employment tax returns, and their accompanying schedules, on magnetic media (including electronic filing). This temporary waiver is extended to all CPEOs; individual requests for waiver do not need to be submitted.

This waiver applies only to Forms 941, Employer's Quarterly Federal Tax Return, filed for the second, third, and fourth quarter of 2020 and only to Forms 943, Employer's Annual Federal Tax Return for Agricultural Employees, filed for calendar year 2020, and their accompanying schedules. Accordingly, CPEOs are permitted, but not required, to file a paper Form 941, and its accompanying schedules, in lieu of electronic submission for the second, third, and fourth quarters of calendar year 2020. In addition, CPEOs are permitted, but not required, to file a paper Form 943, and its accompanying schedules, in lieu of electronic submission for calendar year 2020.

Temporary Relief from Physical Presence Rule for Retirement Plan Participant Elections

IR 2020-110, 6/3/2020; Notice 2020-42, 2020-26 IRB

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Temporary relief from the physical presence requirement for participant election witnessed by a notary public. In the case of a participant election witnessed by a notary public during calendar year 2020, the physical presence requirement is deemed satisfied for remote notarization executed via live audio-video technology that otherwise satisfies the requirements of participant elections under Reg §1.401(a)-21(d)(6) and is consistent with state law requirements that apply to the notary public.

Temporary relief from the physical presence requirement for participant election witnessed by a plan representative. In the case of a participant election witnessed by a plan representative during calendar year 2020, the physical presence requirement is deemed satisfied if the live audio-video technology being used by the plan representative to witness the participant signing the election satisfies the following requirements:

(1) The individual signing the participant election must present a valid photo ID to the plan representative during the live audio-video conference and may not merely transmit a copy of the photo ID prior to or after the witnessing;

(2) The live audio-video conference must allow for direct interaction between the individual and the plan representative (for example, a prerecorded video of the person signing is insufficient);

(3) The individual must transmit by fax or electronic means a legible copy of the signed document directly to the plan representative on the same date it was signed; and

(4) After receiving the signed document, the plan representative must acknowledge that the signature has been witnessed by the plan representative in accordance with the requirements of this Notice and transmit the signed document, including the acknowledgement, back to the individual under a system that satisfies the applicable notice requirements under Reg §1.401(a)-21(c). (That is, the participant must have the effective ability to access the electronic medium used to deliver the signed document back to him, and the participant must be advised that he may request and receive, at no charge, a copy of the document on paper.)

Proposed Regulations Address Direct Primary Care Arrangements and Health Care Sharing Ministry Memberships The Internal Revenue Service released proposed regulations addressing the treatment of certain medical care arrangements under section 213 of the Internal Revenue Code. Section 213 of the Code allows individuals to take an itemized deduction for expenses for medical care, including insurance for medical care, to the extent the expenses exceed 7.5% of adjusted gross income. The proposed regulations address direct primary care (DPC)

arrangements and health care sharing ministry (HCSM) memberships, and provide the following guidance:

• Payments for DPC arrangements are expenses for medical care under section 213 of the Code. Because these payments are for medical care, a health reimbursement arrangement (HRA) provided by an employer generally may reimburse an employee for DPC arrangement payments.

• Payments for membership in a HCSM are expenses for medical care under section 213 of the Code. Because these payments are for medical care, an HRA provided by an employer generally may reimburse an employee for HCSM membership payments.

The proposed regulations respond to Executive Order 13877, which directs the Secretary of the Treasury, to the extent consistent with law, to “propose regulations to treat expenses related to certain types of arrangements, potentially including direct primary care arrangements and healthcare sharing ministries, as eligible medical expenses under Section 213(d)” of the Code.

IRS Outlines Changes to Health Care Spending Available Under CARES Act

The Internal Revenue Service has advised that new rules under the CARES Act provide flexibility for health care spending that may be helpful in the current environment where more people may need at-home services due to measures to fight the coronavirus.

Telehealth and High Deductible Health Plans

Under the CARES Act, a high deductible health plan (HDHP) temporarily can cover telehealth and other remote care services without a deductible, or with a deductible below the minimum annual deductible otherwise required by law. Telehealth and other remote care services also are temporarily included as categories of coverage that are disregarded for the purpose of determining whether an individual who has other health plan coverage in addition to an HDHP is an eligible individual who may make tax-favored contributions to his or her HSA. Thus, an otherwise eligible individual with coverage under an HDHP may still contribute to an HSA despite receiving coverage for telehealth and other remote care services before satisfying the HDHP deductible, or despite receiving coverage for these services outside the HDHP. The temporary rules under the CARES Act, as extended by IRS Notice 2020-29, apply to services provided on or after Jan. 1, 2020, with respect to plan years beginning on or before Dec. 31, 2021.

Expansion of qualified medical expenses

The CARES Act also modifies the rules that apply to various tax-advantaged accounts (HSAs, Archer MSAs, Health FSAs, and HRAs) so that additional items are “qualified medical expenses” that may be reimbursed from those accounts. Specifically, the cost of menstrual care products is now reimbursable. These products are defined as tampons,

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Interest Rates Decrease for the Third Quarter of 2020

The Internal Revenue Service has announced that interest rates will decrease for the calendar quarter beginning July 1, 2020. The rates will be:

• three (3) percent for overpayments [two (2) percent in the case of a corporation];

• one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000;

• three (3) percent for underpayments; and

• five (5) percent for large corporate underpayments.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced are computed from the federal short-term rate determined during April 2020 to take effect May 1, 2020, based on daily compounding.

Questions and Answers about NOL Carrybacks of C Corporations to Taxable Years in which the Alternative Minimum Tax Applies

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) amended section 172(b)(1) to provide for a carryback of any net operating loss (NOL) arising in a taxable year beginning after December 31, 2017, and before January 1, 2021, to each of the five taxable years preceding the taxable year in which the loss arises. The Internal Revenue Service (IRS) also recently issued temporary procedures for faxing certain Forms 1139 and 1045 to the IRS. This document provides further information for subchapter C corporation taxpayers (C corporations) that are carrying back NOLs to years in which the alternative minimum tax (AMT) applies.

Q1. A C corporation with an NOL arising in a taxable year beginning after December 31, 2017 (post-2017 year) is carrying back all or a portion of that NOL to a taxable year beginning before January 1, 2018 (pre-2018 year). Although the AMT does not apply to C corporations in post-2017 years, it does apply to such taxpayers in pre-2018 years. For purposes of determining the C corporation's alternative minimum taxable

pads, liners, cups, sponges or other similar products. In addition, over-the-counter products and medications are now reimbursable without a prescription. The new rules apply to amounts paid after Dec. 31, 2019. Taxpayers should save receipts of their purchases for their records and so that they are able to submit claims for reimbursements.

IRS Provides Answers About Coronavirus Related Tax Relief for Qualified Opportunity Funds and Investors

The Internal Revenue Service has provided guidance for Qualified Opportunity Funds (QOFs) and their investors in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic.

Notice 2020-39 answers questions regarding relief from certain requirements under section 1400Z-2 of the Internal Revenue Code (Code) and the implementing regulations. Additionally, the IRS has updated the Qualified Opportunity Zones frequently asked questions.

Taxpayers who sold property for an eligible gain and who would have had 180 days to invest in a QOF to defer that gain, may have additional time. Notice 2020-39 provides that if a taxpayer’s 180th day to invest in a QOF would have fallen on or after April 1, 2020, and before December 31, 2020, the taxpayer now has until December 31, 2020 to invest that gain into a QOF. (The 180th day for some of these taxpayers was already postponed through July 15, 2020, under Notice 2020-23.) In addition, the notice provides that the period between April 1, 2020, and December 31, 2020, is suspended for purposes of the 30-month period during which property may be substantially improved.

The guidance also provides that, due to the COVID-19 pandemic, a QOF’s failure to hold less than the 90% of its assets in Qualified Opportunity Zone Property on any semi-annual testing dates from April 1, 2020, through Dec. 31, 2020, is due to reasonable cause under section 1400Z-2(f)(3) and such failure does not prevent qualification of an entity as a QOF or an investment in a QOF from being a qualifying investment. As such, the QOF will not be liable for the statutory penalty under section 1400Z-2(f) due to such a failure during this period.

For Qualified Opportunity Zone Business projects that meet the requirements of the 31-month working capital safe harbor under the final regulations, the notice reminds taxpayers that due to the COVID-19 pandemic these projects have up to an additional 24 months in which to expend their working capital. Similarly, the notice reminds taxpayers that due to the COVID-19 pandemic, QOFs that received distributions of QOF stock or partnership interests as a return of capital or realized proceeds from a sale of that stock, partnership interest or qualified opportunity zone property have an additional 12 months in which to reinvest those amounts in the manner intended before the COVID-19 pandemic.

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income in the pre-2018 year, what should be the amount of alternative tax net operating loss (ATNOL) arising in the post-2017 year?

A1. For Forms 1120X, Amended U.S. Corporation Income Tax Return, or 1139, Corporation Application for Tentative Refund, filed on or after June 1, 2020, treat the ATNOL amount arising in a post-2017 year as zero. The processing of the C corporation's refund may be delayed if it uses a different method to determine the amount of its ATNOL.

Q2. A C corporation has already filed amended returns or a claim for tentative carryback adjustment carrying back an NOL from a post-2017 year to pre-2018 years, but did not treat the ATNOL for the post-2017 year as zero. Is the C corporation required to take any action, such as refiling, and follow this guidance?

A2. The C corporation does not need to take any action, or refile a Form 1120X or Form 1139 that was filed before June 1, 2020, unless contacted by the IRS.

Q3. As a result of an NOL carryback, a C corporation either has an AMT liability in a pre-2018 carryback year or has released minimum tax credits (MTC) under section 53 in a pre-2018 carryback year because it no longer has enough regular tax liability to use them. The C corporation is not able to use the MTC generated or released by the NOL carryback in any taxable year prior to 2018. The C corporation made an election under section 53(e)(5) to recover 100% of its MTCs as refundable credits in its first taxable year beginning in 2018. May the C corporation claim both the NOL carryback and MTC refund for 2018 on the same Form 1139?

A3. Yes, the C corporation may file a single Form 1139, following the instructions in questions 11 and 12 of the temporary procedures to fax certain Forms 1139 and 1045 due to COVID-19.

Q4. As a result of an NOL carryback, the C corporation either has an AMT liability in a pre-2018 carryback year or it has released MTCs under section 53 in a pre-2018 carryback year because it no longer has enough regular tax liability to use them. The C corporation is able to use the MTC generated or released by the NOL carryback in a subsequent year that is part of the five-year carryback period preceding the year in which the NOL arose (the carryback period). May the C corporation claim both the NOL carryback and the decrease in tax liability from the MTC on Form 1139?

A4. Yes, if the MTC generated or released by the NOL carryback in one year in the carryback period is used in a subsequent year in the carryback period to reduce the C corporation's tax liability (as opposed to resulting in a refundable MTC), then the C corporation may claim a refund for any decrease in tax resulting from that use of the MTC on Form 1139, noting the change in the MTC in the appropriate column of line 21 for the year in which the MTC is used.

Caution: Form 1139 cannot be used to claim the refundable portion of the MTC (as opposed to a refund resulting from a reduction of the C corporation's tax liability due to the use of the MTC), except in the case of an election under section 53(e)(5). If a C corporation is entitled to a refundable MTC for a year in the carryback period for any reason other than an election under section 53(e)(5), it must separately file a Form 1120X to claim a refund of that portion of the MTC. For example, if a C corporation does not make an election under section 53(e)(5) to recover the full amount of its MTC in the first taxable year beginning in 2018, the C corporation may recover the portion of the MTC made refundable by section 53(e)(3) only by filing a Form 1120X.

Q5. A C corporation has refundable MTCs and wants to make the election under section 53(e)(5) to claim 100% of its refundable MTCs in its first taxable year beginning in 2018. How does the C corporation make this election?

A5. The election under section 53(e)(5) to claim 100% of a C corporation's refundable MTC in its first taxable year beginning in 2018 may be made by either filing a Form 1120X or a Form 1139. For either form used, the C corporation must include at the top of the form, "Electing to Take 100% Refundable Credit Amount in 2018 – per CARES Act Section 2305(b)". Instructions for completing the Form 1139 are available in questions 10, 11, and 12 of the temporary procedures to fax certain Forms 1139 and 1045 due to COVID-19.

Q6. Is there a due date by which a C corporation must make the section 53(e)(5) election?

A6. Yes. An election on Form 1139 must be filed no later than December 30, 2020. If the Form 1139 includes both a claim for refundable MTC and an NOL carryback that arose in a taxable year that began during 2018 and ended on or before June 30, 2019, the Form 1139 must be filed by the earlier of the extended due date provided under Notice 2020-26, or December 30, 2020. An election on Form 1120X must be filed within the period described under section 6511(a) that applies to the C corporation's first taxable year beginning in 2018.

Proposed Regulations Define Real Property for 1031 Tax-free Like-kind Exchanges

The IRS has issued proposed reliance regs that add a definition of real property for purposes of Code Sec. 1031 tax-free like-kind exchanges. The proposed regs also provide a rule addressing a taxpayer's receipt of personal property that is incidental to real property the taxpayer receives in an otherwise tax-free like-kind exchange.

As amended by the Tax Cuts and Jobs Act (TCJA, PL 115-97), Code Sec. 1031(a) provides that no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment (relinquished real property) if the relinquished real property is exchanged solely for real property of a like kind that is to be held either for productive use in a trade or business or for investment (replacement real

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the term real property under the proposed regs.

The term "improvements to land" means inherently permanent structures and the structural components of inherently permanent structures. (Prop Reg §1.1031(a)-3(a)(2)(i)

The term "inherently permanent structures" means any building or other structure that is a distinct asset (defined below) and is permanently affixed to real property and that will ordinarily remain affixed for an indefinite period of time. (Prop Reg §1.1031(a)-3(a)(2)(ii)(A))

A building is any structure or edifice enclosing a space within its walls, and covered by a roof, the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space. Buildings include the following distinct assets if permanently affixed: houses, apartments, hotels, motels, enclosed stadiums and arenas, enclosed shopping malls, factories and office buildings, warehouses, barns, enclosed garages, enclosed transportation stations and terminals, and stores. (Prop Reg §1.1031(a)-3(a)(2)(ii)(B))

Inherently permanent structures include the following distinct assets, if permanently affixed: in-ground swimming pools; roads; bridges; tunnels; paved parking areas, parking facilities, and other pavements; special foundations; stationary wharves and docks; fences; inherently permanent advertising displays (for which an election under Code Sec. 1033(g)(3), to treat the displays as real property, is in effect); inherently permanent outdoor lighting facilities; railroad tracks and signals; telephone poles; power generation and transmission facilities; permanently installed telecommunications cables; microwave transmission, cell, broadcasting, and electric transmission towers; oil and gas pipelines; offshore drilling platforms, derricks, oil and gas storage tanks; grain storage bins and silos; and enclosed transportation stations and terminals. Distinct assets may be affixed to real property by weight alone. (Prop Reg §1.1031(a)-3(a)(2)(ii)(C))

If property is not listed as an inherently permanent structure in Prop Reg §1.1031(a)-3(a)(2)(ii)(C), then the determination of whether the property is an inherently permanent structure is based on the following factors:

(1) The manner in which the distinct asset is affixed to real property;

(2) Whether the distinct asset is designed to be removed or to remain in place;

(3) The damage that removal of the distinct asset would cause to the item itself or to the real property to which it is affixed;

(4) Any circumstances that suggest the distinct asset was not affixed for an indefinite period; and

(5) The time and expense required to move the distinct asset. (Prop Reg §1.1031(a)-3(a)(2)(ii)(C))

property). This type of transaction is sometimes referred to as a Code Sec. 1031 tax-free like-kind exchange.

Prior to the TCJA amendment, Code Sec. 1031 was not limited to real property. Thus, there was no need to provide a definition of real property for purposes of that Code section. (Preamble to Prop Reg REG-117589-18)

Under Code Sec. 1031(a)(3), real property a taxpayer receives in an exchange is not like-kind property unless, within 45 days of the taxpayer's transfer of the relinquished real property, real property is identified as replacement real property to be received in the exchange.

Under Reg. §1.1031(k)-1(f)(1), if a taxpayer actually or constructively receives money or property that is not of a like kind to the taxpayer's relinquished real property (other property) before the taxpayer receives like-kind replacement real property, gain or loss may be recognized.

Under Reg. §1.1031(k)-1(g)(4)(i), in the case of a taxpayer's transfer of relinquished property involving a qualified intermediary, the qualified intermediary is not considered the agent of the taxpayer for purposes of Code Sec. 1031(a), and the determination of whether the taxpayer is in actual or constructive receipt of money or other property is made as if the qualified intermediary is not the agent of the taxpayer.

However, Reg. §1.1031(k)-1(g)(4)(i) applies only if, pursuant to the requirements of Reg. §1.1031(k)-1(g)(6)(i), the agreement between the taxpayer and the qualified intermediary expressly limits the taxpayer's rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by the qualified intermediary.

Under Reg. §1.1031(k)-1(g)(7), in determining whether a taxpayer's rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property are expressly limited as provided in Reg. §1.1031(k)-1(g)(6), the taxpayer's receipt of or right to receive items that a seller may receive as a consequence of the disposition of property and that are not included in the amount realized from the disposition of property (e.g., prorated rents) are disregarded.

Proposed definition of real property. The term "real property" for purposes of Code Sec. 1031 and its regs means land and improvements to land, unsevered natural products of land, and water and air space superjacent to land. (Prop Reg §1.1031(a)-3(a)(1))

An interest in real property, including fee ownership, co-ownership, a leasehold, an option to acquire real property, an easement, or a similar interest, is real property for purposes of Code Sec. 1031 and the proposed regs. (Prop Reg §1.1031(a)-3(a)(1))

Except for a state's characterization of shares in a mutual ditch, reservoir, or irrigation company described in Prop Reg §1.1031(a)-3(a)(5)(i) (discussed below), local law definitions are not controlling for purposes of determining the meaning of

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Property that is in the nature of machinery or is essentially an item of machinery or equipment is generally not an inherently permanent structure and not real property for purposes of the proposed regs. In the case, however, of a building or inherently permanent structure that includes property in the nature of machinery as a structural component, the machinery is real property provided it serves the inherently permanent structure and does not produce or contribute to the production of income other than for the use or occupancy of space. (Prop Reg §1.1031(a)-3(a)(2)(ii)(D))

The term "structural component" means any distinct asset that is a constituent part of, and integrated into, an inherently permanent structure. If interconnected assets work together to serve an inherently permanent structure (e.g., systems that provide a building with electricity, heat, or water), the assets are analyzed together as one distinct asset that may be a structural component. (Prop Reg §1.1031(a)-3(a)(2)(iii)(A))

A structural component may qualify as real property only if the taxpayer holds its interest in the structural component together with a real property interest in the space in the inherently permanent structure served by the structural component. If a distinct asset is customized, the customization does not affect whether the distinct asset is a structural component. (Prop Reg §1.1031(a)-3(a)(2)(iii)(A))

Tenant improvements to a building that are inherently permanent or otherwise classified as real property because they are structural components are real property. However, property produced for sale, such as bricks, nails, paint, and windowpanes, that is not real property in the hands of the producing taxpayer or a related person (as defined in Code Sec. 1031(f)(3)) but that may be incorporated into real property by an unrelated buyer, is not treated as real property by the producing taxpayer. (Prop Reg §1.1031(a)-3(a)(2)(iii)(A))

Structural components include the following items, provided the item is a constituent part of, and integrated into, an inherently permanent structure: walls; partitions; doors; wiring; plumbing systems; central air conditioning and heating systems; pipes and ducts; elevators and escalators; floors; ceilings; permanent coverings of walls, floors, and ceilings; insulation; chimneys; fire suppression systems, including sprinkler systems and fire alarms; fire escapes; security systems; humidity control systems; and other similar property. (Prop Reg §1.1031(a)-3(a)(2)(iii)(B))

If a component of a building or inherently permanent structure is a distinct asset and is not listed as a structural component in Prop Reg §1.1031(a)-3(a)(2)(iii)(B), then the determination of whether the component is a structural component is based on the following factors:

(1) The manner, time, and expense of installing and removing the component;

(2) Whether the component is designed to be moved;

(3) The damage that removal of the component would cause

to the item itself or to the inherently permanent structure to which it is affixed; and

(4) Whether the component is installed during construction of the inherently permanent structure. (Prop Reg §1.1031(a)-3(a)(2)(iii)(B))

Unsevered natural products of land, including growing crops, plants, and timber; mines; wells; and other natural deposits, generally are treated as real property. Natural products and deposits, such as crops, timber, water, ores, and minerals, cease to be real property when they are severed, extracted, or removed from the land. (Prop Reg §1.1031(a)-3(a)(3))

A distinct asset is analyzed separately from any other assets to which the asset relates to determine if the asset is real property, whether as land, an inherently permanent structure, or a structural component of an inherently permanent structure. Buildings and other inherently permanent structures are distinct assets. Assets and systems listed as a structural component are treated as distinct assets. (Prop Reg §1.1031(a)-3(a)(4)(i))

The determination of whether a particular separately identifiable item of property is a distinct asset is based on all the facts and circumstances. In particular, the following factors must be taken into account:

(A) Whether the item is customarily sold or acquired as a single unit rather than as a component part of a larger asset;

(B) Whether the item can be separated from a larger asset, and if so, the cost of separating the item from the larger asset;

(C) Whether the item is commonly viewed as serving a useful function independent of a larger asset of which it is a part; and

(D) Whether separating the item from a larger asset of which it is a part impairs the functionality of the larger asset. (Prop Reg §1.1031(a)-3(a)(4)(ii))

To the extent an intangible asset derives its value from real property or an interest in real property, is inseparable from that real property or interest in real property, and does not produce or contribute to the production of income other than consideration for the use or occupancy of space, then the intangible asset is real property or an interest in real property. (Prop Reg §1.1031(a)-3(a)(5)(i))

Real property includes shares in a mutual ditch, reservoir, or irrigation company (described in Code Sec. 501(c)(12)(A)) if, at the time of the exchange, the shares have been recognized by the highest court of the State in which the company was organized, or by a State statute, as constituting or representing real property or an interest in real property. (Prop Reg §1.1031(a)-3(a)(5)(i))

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This credit phases out over 6 quarters (“phase-out period”) beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the U.S. (determined on a cumulative basis for sales after December 31, 2009). (Code Sec. 30D(e)(2))

The IRS provides a list of qualifying vehicles on its website.

The Code Sec. 30D(a) credit is claimed on Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit (Including Qualified Two- or Three-Wheeled Plug-in Electric Vehicles).New plug-in electric drive motor vehicle added to credit list. The IRS has added Bentley Motors’ 2020 Bentayga Hybrid SUV to the list of vehicles, on its website, eligible for the plug-in electric drive motor vehicle credit under Code Sec. 30D(a).According to the IRS website, the 2020 Bentayga Hybrid SUV is eligible for the maximum credit of $7500.

IRS Finalizes Guidance for the Section 199A Deduction for Shareholders of Regulated Investment Companies

The Internal Revenue Service has issued final regulations permitting a regulated investment company (RIC) that receives qualified real estate investment trust (REIT) dividends to report dividends the RIC pays to its shareholders as section 199A dividends.

Section 199A, enacted as part the Tax Cuts and Jobs Act (TCJA), allows individual taxpayers and certain trusts and estates to deduct up to 20 percent of certain income (section 199A deduction).

The section 199A deduction is available to eligible taxpayers with qualified business income (QBI) from qualified trades or businesses operated as sole proprietorships or through partnerships, S corporations, trusts, or estates, as well as for qualified REIT dividends and income from publicly traded partnerships. The section 199A deduction is not available for C corporations.

The regulations issued today provide that a shareholder in a RIC may, subject to limitations, treat a section 199A dividend received from a RIC as a qualified REIT dividend for purposes of determining the section 199A deduction.

The regulations also provide additional guidance on the treatment of previously disallowed losses that are included in QBI in subsequent years and provide guidance for taxpayers who hold interests in split-interest trusts or charitable remainder trusts.

IRS Rule Would Implement Excise Tax On Certain Executive Compensation The Internal Revenue Service has issued a proposed rule implementing a provision of the Tax Cuts and Jobs Act of 2017 that imposed a 21% excise tax on certain executive compensation paid by tax-exempt organizations. Under the

A license, permit, or other similar right that is solely for the use, enjoyment, or occupation of land or an inherently permanent structure and that is in the nature of a leasehold or easement generally is an interest in real property. (Prop Reg §1.1031(a)-3(a)(5)(ii))

However, a license or permit to engage in or operate a business on real property is not real property or an interest in real property if the license or permit produces or contributes to the production of income other than consideration for the use and occupancy of space. (Prop Reg §1.1031(a)-3(a)(5)(ii))

The proposed regs concerning the definition of real property apply only for purposes of Code Sec. 1031. No inference is intended with respect to the classification or characterization of property for other purposes of the Code. (Prop Reg §1.1031(a)-3(a)(6))

The proposed regs add to the list of items in Reg. §1.1031-1(g)(7) and provide that personal property that is incidental to replacement real property is disregarded in determining whether a taxpayer's rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by a qualified intermediary are expressly limited. (Prop Reg §1.1031(k)-1(g)(7)(iii))

Personal property is incidental to real property acquired in an exchange if, in standard commercial transactions, the personal property is typically transferred together with the real property, and the aggregate fair market value of the incidental personal property transferred with the real property does not exceed 15% of the aggregate fair market value of the replacement real property. (Prop Reg §1.1031(k)-1(g)(7)(iii))

Effective date. The proposed regs are proposed to apply to exchanges of real property beginning on or after the effective date of the final regs. (Prop Reg §1.1031(a)-3(c), Prop Reg §1.1031(k)-1(g)(9))

But, pending issuance of the final regs, a taxpayer may rely on these proposed regs, if followed consistently and in their entirety, for exchanges of real property beginning after December 31, 2017, and before the final regs are published. (Preamble to Prop Reg REG-117589-18)

IRS Adds Bentley Plug-in Electric Vehicle to Credit List

The IRS has added Bentley Motors’ 2020 Bentayga Hybrid SUV to the list of vehicles, on its website, eligible for the plug-in electric drive motor vehicle credit.

Code Sec. 30D(a) provides a credit to the purchaser of a qualified plug-in electric drive motor vehicles including passenger vehicles and light trucks (“qualifying vehicles”).

For qualifying vehicles acquired after December 31, 2009, the Code Sec. 30D(a) credit is equal to $2,500 (Code Sec. 30D(b)(2) plus an additional amount, based on battery capacity, that cannot exceed $5,000. (Code Sec. 30D(b)(3))

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1, 2018. These losses are used, for purposes of Code Sec. 199A, in order from the oldest to the most recent on a first-in, first-out (FIFO) basis.

Taxpayers and practitioners have questioned whether the exclusion of Code Sec. 461(l) from the list of loss disallowance and suspension provisions in Reg §1.199A-3(b)(1)(iv) means that losses disallowed under Code Sec. 461(l) are not considered QBI in the year the losses are taken into account in determining taxable income. Generally, for tax years beginning after December 31, 2020, and before January 1, 2026, Code Sec. 461(l) disallows an excess business loss for taxpayers other than C corporations. Any disallowed excess business loss is treated as a net operating loss carryover for the tax year for purposes of determining any net operating loss carryover under Code Sec. 172(b) in subsequent tax years. (Code Sec. 172(b))

IRS now says that the list of loss disallowance and suspension provisions in Reg §1.199A-3(b)(1)(iv) is not exhaustive. If a loss or deduction that would otherwise be included in QBI is disallowed or suspended under any provision of the Code, such loss or deduction is generally taken into account for purposes of computing QBI in the year it is taken into account in determining taxable income. (T.D. 9899) The final regs clarify this point by amending Reg §1.199A-3(b)(1)(iv)(A) to specifically reference excess business losses disallowed by Code Sec. 461(l) and treated as a net operating loss (NOL) carryover for the tax year for purposes of determining any NOL carryover under Code Sec. 172(b) in subsequent tax years.

The final regs also address how the phase-in rules apply when a taxpayer has a suspended or disallowed loss or deduction from an SSTB. Whether an individual has taxable income at or below the threshold amount, within the phase-in range, or in excess of the phase-in range, the determination of whether a suspended or disallowed loss or deduction attributable to an SSTB is from a qualified trade or business is made in the year the loss or deduction is incurred. If the individual’s taxable income is at or below the threshold amount in the year the loss or deduction is incurred, and such loss would otherwise be QBI, the entire disallowed loss or deduction is treated as QBI from a separate trade or business in the subsequent tax year in which the loss is allowed. If the individual’s taxable income is within the phase-in range, then only the applicable percentage of the disallowed loss or deduction is taken into account in the subsequent tax year. If the individual’s taxable income exceeds the phase-in range, none of the disallowed loss or deduction will be taken into account in the subsequent tax year. (Reg §1.199A-3(b)(1)(iv)(C))

If a RIC has certain items of income or gain, subchapter M of chapter 1 of the Code provides rules under which a RIC may pay dividends that a shareholder in the RIC may treat in the same manner (or a similar manner) as the shareholder would treat the underlying item of income or gain if the shareholder realized it directly. (Conduit treatment)

The February 2019 Proposed regs include rules providing conduit treatment for qualified REIT dividends earned by a RIC.

proposed rule, any deferred compensation arrangement or retention or retirement bonus not vested prior to the first taxable year beginning after Dec. 31, 2017 is subject to the tax. The agency will accept comments on the proposed rule for 60 days after its publication in the June 11 Federal Register. AHA has urged Congress to provide an exception for existing contracts or nonqualified deferred compensation plans for applicable tax-exempt organizations. Final Qualified Business Income Deduction Regulations Include Suspended Loss Rules

T.D. 9899, 6/25/2020; Reg §1.199A-3, Reg §1.199A-6

The IRS has issued final regs concerning the qualified business income (QBI) deduction under Code Sec. 199A. The regs provide guidance on the treatment of previously suspended losses included in QBI and the determination of the Code Sec. 199A deduction for taxpayers that hold interests in regulated investment companies (RICs) and certain estates and trusts.Code Sec. 199A provides a deduction of up to 20% of QBI from a U.S. trade or business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate (Code Sec. 199A deduction).

The Code Sec. 199A deduction may be taken by individuals and by some trusts and estates. (Code Sec. 199A(a))

If the taxpayer’s taxable income exceeds the statutorily defined amount in Code Sec. 199A(e)(2) (threshold amount), the taxpayer’s Code Sec. 199A deduction may be limited based on (i) whether the taxpayer engages in a Specified Service Trade or Business (SSTB), (ii) the amount of W-2 wages paid with respect to the trade or business (W-2 wages), and/or (iii) the unadjusted basis immediately after acquisition (UBIA) of qualified property held for use in the trade or business (UBIA of qualified property). (Code Sec. 199A(b)(2)) These statutory limitations are subject to phase-in rules in Code Sec. 199A(b)(3)(B) based upon taxable income above the threshold amount (phase-in rules).

Code Sec. 199A also provides a deduction of up to 20% of a taxpayer's combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, including qualified REIT dividends and qualified PTP income earned through passthrough entities. (Code Sec. 199A(b)(1)(B))

Code Sec. 199A applies to tax years that begin after 2017 and before 2026. (P.L. 115-97, Sec. 1101(a); Code Sec. 199A(i))The final regs adopts the February 2019 Proposed Regs with clarifying changes and additional modifications.

Reg §1.199A-3(b)(1)(iv) provides that previously disallowed losses or deductions (including such losses or deductions under Code Sec. 465, Code Sec. 469, Code Sec. 704(d), and Code Sec. 1366(d)) allowed in the tax year are generally taken into account for purposes of computing QBI, except to the extent the losses or deductions were disallowed, suspended, limited, or carried over from tax years ending before January

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Proposed Regulations Clarify Qualifying Relative Definition

Preamble to Prop Reg REG-118997-19; Prop Reg §1.24-1; Prop Reg §1.152-3

The IRS has issued proposed reliance regs that clarify the definition of a “qualifying relative” for purposes of various provisions of the Code for taxable years 2018 through 2025.

While Code Sec. 151(a) allows a taxpayer to claim deductions for exemptions for the taxpayer and his or her spouse (Code Sec. 151(b)), and for any dependents (Code Sec. 151(c)), the exemption amount for tax years 2018 through 2025 is zero.

Before it was amended by the Tax Cut and Jobs Act ("TCJA," PL 115-97, 12/22/2017), Code Sec. 151(d) provided for an exemption amount of a base dollar amount that was adjusted for inflation. Before the TCJA, the exemption amount for 2018 was calculated to be $4,150. (Rev Proc 2018-18, 2018-10 IRB 392)

Code Sec. 152(a) defines a "dependent" to include a "qualifying relative." One of the qualifications for a person being a qualifying relative is that his gross income for the calendar year in which the taxpayer's tax year begins is less than the Code Sec. 151(d) exemption amount. (Code Sec. 152(d)(1)(B))

One provision of the Code that references a “qualifying relative” is the Code Sec. 24 child tax credit. Code Sec. 24(h)(4)(A) provides a $500 credit for certain dependents of a taxpayer, including qualifying relatives as defined in Code Sec. 152(d), “other than a qualifying child described in subsection (c).” Like the amendment to Code Sec. 151(d) reducing the exemption amount to zero, this new credit applies for tax years 2018 through 2025.

Commentators have asked whether the reference to “subsection (c)” in Code Sec. 24(h)(4)(A) refers to Code Sec. 24(c) or Code Sec. 152(c) (both of which define qualifying child). (Preamble to Prop Reg REG-118997-19)

On January 19, 2017 (prior to the TCJA), the IRS published a notice of proposed rulemaking providing rules regarding the definition of a dependent under Code Sec. 152, which includes a qualifying relative (January 2017 Proposed Regulations).

On August 28, 2018, the IRS issued Notice 2018-70, 2018-38 IRB 441. This notice announced the IRS’s intent to reflect the changes made to Code Sec. 151 by the TCJA by issuing proposed regs providing that the reduction of the exemption amount to zero under Code Sec. 151(d)(5)(A) for taxable years 2018 through 2025 will not be taken into account in determining whether an individual meets the requirement of Code Sec. 152(d)(1)(B) to be a qualifying relative.

Thus, the Notice points out, in defining a qualifying relative for purposes of various provisions of the Code that refer to the definition of dependent in Code Sec. 152, including the credit under Code Sec. 24(h)(4), the Code Sec. 151(d) exemption

The final regs adopt the proposed rules. (Reg §1.199A-3(d))The February 2019 Proposed regs do not provide conduit treatment for qualified PTP income earned by a RIC. IRS says it is evaluating whether it is appropriate and practicable to provide conduit treatment for qualified PTP income or other income of a RIC. (T.D. 9899)

Under Reg §1.199A-6(d)(3)(ii), the QBI, W–2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income of a trust or estate are allocated to each beneficiary and to the trust or estate based on the relative proportion of the trust’s or estate’s distributable net income (DNI) for the tax year that is distributed or required to be distributed to the beneficiary or is retained by the trust or estate. Prop Reg §1.199A-6(d)(3)(iii) further provides that a trust described in Code Sec. 663(c) (trust or estate with more than one beneficiary; "separate share rule") with substantially separate and independent shares for multiple beneficiaries will be treated as a single trust for purposes of determining whether the taxable income of the trust exceeds the threshold amount.

In the final regs, IRS has clarified the QBI separate share rule to provide that, in the case of a trust or estate described in Code Sec. 663(c) with substantially separate and independent shares for multiple beneficiaries, the trust or estate will be treated as a single trust or estate not only for purposes of determining whether the taxable income of the trust or estate exceeds the threshold amount but also in determining taxable income, net capital gain, net QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income for each trade or business of the trust or estate, and computing the W-2 wage and UBIA of qualified property limitations. The allocation of these items to the separate shares of a trust or estate will be governed by the rules under Reg §1.663(c)-1 through Reg §1.663(c)-5. (Reg §1.199A-6(d)(3)(iii))

The final regs include, without change, the February 2019 Proposed regs rules under which the taxable recipient of a unitrust or annuity amount from a charitable remainder trust described in Code Sec. 664 may take into account QBI, qualified REIT dividends, or qualified PTP income for purpose of determining the recipient’s Code Sec. 199A deduction. (Reg §1.199A-6(d)(3)(v))

The regs apply to tax years beginning after August 24, 2020. Taxpayers may choose to apply the regs for tax years beginning on or before August 24, 2020. Alternatively, taxpayers who chose to rely on the February 2019 Proposed regs for tax years beginning on or before August 24, 2020 may continue to do so for such years. However, taxpayers who choose to apply any section of these regs or continue to rely on any section of the February 2019 Proposed regs for tax years beginning on or before August 24, 2020 must follow the rules of the applicable section in a consistent manner for each such year. (TD 9899, Reg §1.199A-3(e)(2)(iii), Reg §1.199A-3(e)(2)(iv), Reg §1.199A-6(e)(2)(iii), Reg §1.199A-6(e)(2)(iv))

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continually updating. For more information about the previous update to the FAQS, see Updated EIP FAQs include added information on prepaid debit cards (06/15/2020) .

Tracing missing EIPs. If a taxpayer received an EIP by check, but it was lost, stolen or destroyed—or if the taxpayer received a Notice 1444, Your Economic Impact Payment, in the mail saying the payment was issued, but the taxpayer has not received the EIP—the taxpayer should initiate a trace of the payment. (Economic Impact Payment Information Center, FAQs 54 and 55)

FAQ 56 details how to request a payment trace.

Q56. How do I request a Payment Trace on my Economic Impact Payment?

A56. If your payment was issued by direct deposit, your first step is to check with your bank and make sure they didn't receive a deposit.

You should request a trace on your Payment if you received Notice 1444 or Get My Payment shows your payment was issued on a specific date, but you have not received it and it has been more than: 5 days since the scheduled deposit date; 4 weeks since it was mailed by check to a standard address; 6 weeks since it was mailed, and you have a forwarding address on file with the local post office; or 9 weeks since it was mailed, and you have a foreign address.

Do not request a Payment trace to determine if you were eligible for a payment, the amount of payment you should have received, or you have not received a Notice 1444 or a payment date from Get My Payment.

How IRS processes your claim:

IRS will process your claim for a missing payment in one of two ways:

If the check was not cashed, we will issue a replacement. If you find the original check, you must return it as soon as possible.

If the refund check was cashed, the Bureau of the Fiscal Service (BFS) will send you a claim package that includes a copy of the cashed check. Follow the instructions. BFS will review your claim and the signature on the canceled check before determining whether they can issue you a replacement check.

You will generally receive a response 6 weeks after IRS receives your request for a Payment trace, but there may be delays due to limited staffing.

To start a Payment trace:

Call IRS at 800-919-9835 (you may experience long wait times or recorded help because our staffing is limited) or submit a completed Form 3911, Taxpayer Statement Regarding

amount referenced in Code Sec. 152(d)(1)(B) will be treated as $4,150 (adjusted for inflation), for tax years in which the Code Sec. 151(d)(5)(A) exemption amount is zero.

Consistent with Notice 2018-70, the proposed regs provide that in determining whether an individual is a qualifying relative for purposes of various provisions of the Code that refer to Code Sec. 152 in years in which the exemption amount is zero, the Code Sec. 151(d) exemption amount is the inflation-adjusted Code Sec. 152(d)(1)(B) exemption amount published annually in a Revenue Procedure. (Prop Reg §1.152-3(c)(3)(i), Preamble to Prop Reg REG-118997-19)

Thus, the Code Sec. 151(d) exemption amount is $4,150 for 2018 (Rev Proc 2017-58, Sec. 3.24, 2017-45 IRB 489, modified and superseded by Rev Proc 2018-18, 2018-10 IRB 392); $4,200 for 2019 (Rev Proc 2018-57, Sec. 3.25, 2018-49 IRB 827); and $4,300 for 2020 (Rev Proc 2019-44, Sec. 3.25, 2019-47 IRB 1093). (Preamble to Prop Reg REG-118997-19)

In addition, the proposed regs clarify that the reference to “subsection (c)” in Code Sec. 24(h)(4)(A) refers to Code Sec. 24(c). (Prop Reg §1.24-1(a))

The proposed regs also withdraw § 1.152-3(d)(2) of the January 2017 Proposed Regulations and replace it with Prop Reg §1.152-3(d)(2) to reflect amendments to Code Sec. 152(d)(5) made by the TCJA. The reproposed reg is substantively the same as the withdrawn January 2017 Proposed Regulation. (Preamble to Prop Reg REG-118997-19)

Prop Reg §1.24-1(a) and Prop Reg §1.152-3(d)(2) are proposed to be effective for taxable years beginning on or after the date the regs are published as final regs. (Prop Reg §1.24-1(b), Preamble to Prop Reg REG-118997-19)

Prop Reg §1.152-3(c)(3)(i) is proposed to apply to taxable years ending after August 28, 2018. (Prop Reg §1.152-3(c)(3)(ii))

But pending the issuance of final regs, taxpayers may rely on the proposed regs in any open taxable year. (Preamble to Prop Reg REG-118997-19)

EIP FAQs Updated to Include Information on Tracing Payments

IRS has continued to update the frequently asked questions (FAQs) on its Economic Impact Payment (EIP) Information Center website. This article discusses updates as of June 23, 2020.

Background. Act (CARES Act, PL 116-136, 3/27/2020), IRS is making economic impact payments (EIPs) to certain taxpayers. The eligibility for EIPs and the amount of EIP are generally dependent on the taxpayer's 2019 federal income tax return or, if he didn't file that return by the time IRS determined his eligibility, his 2018 federal income tax return.

The IRS has a series of FAQs regarding EIPs that it is

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Each count of aiding the preparation of false tax returns and filing false tax returns provides for a sentence of up to three years in prison, three years of supervised release and a fine of $250,000 or twice the gross gain or loss, whichever is greater. Sentences are imposed by a federal district court judge based upon the U.S. Sentencing Guidelines and other statutory factors.

Dallas-Fort Worth Man is Sentenced to Prison in $2.8 million Tax-return Prep Scheme

His business was Super Professional Tax Services, but Oma Ungu’s return preparation appears to have been less than proficient.

The 61-year-old Grand Prairie man was sentenced in U.S. District Court to four years and nine months in prison for his role in a $2.8 million tax-return preparation scheme, the U.S. Attorney’s Office for the Northern District of Texas said.

Ungu pleaded guilty in January to conspiracy to aid and assist in the preparation of a false tax return. U.S. District Judge Terry Means sentenced him in Fort Worth.

Ungu admitted that between 2013 and 2016, Super Professional Tax Services, an Arlington business he owned and operated, prepared and filed false tax returns on behalf of its clients, according to a factual resume filed in the case. Ungu personally prepared a tax return in 2015 that claimed that one of his clients had significant unreimbursed business expenses for mileage which provided the client with a substantial reduction in his taxable income, U.S. Attorney’s Office for the Northern District of Texas said. Ungu knew the client was not entitled to claim a deduction for the expenses.

“When our tax laws are ignored, especially by those trained as professionals, everyone loses,” U.S. Attorney Erin Nealy Cox wrote in a statement. “We are committed to protecting the integrity of our tax system by giving taxpayers confidence that everyone plays by the same rules. Tax return preparers who exploit their clients and the tax system to file fraudulent returns will be prosecuted and held accountable for their criminal conduct.”

Robert Poteet, a former Ungu employee, pleaded guilty in January 2019 to aiding and assisting in the preparation and presentation of false and fraudulent tax returns and was sentenced to 18 months in prison.

Justice Department Seeks to Shut Down Fraudulent Chicagoland Tax Return Business

The United States has filed a complaint seeking to permanently bar Markham, Illinois tax preparer Patricia Rivers, her daughter-in-law, Ki’esha M. Gary, and Rivers’s business, Alpha II Omega Tax, from preparing federal tax returns for others, the Justice Department announced today.

The complaint against Rivers, Gary, and Alpha II Omega Tax

Refund.

Regarding Form 3911:

• If you submit Form 3911 and you are Married Filing Jointly, both spouses must sign the form;

• write "EIP" on the top of the form and complete Sections I, II and III;

• answer the refund questions as they relate to your EIP;• when completing Number 7 under Section I, check the box for “Individual” (as opposed to “Business”) as the Type of return; and

• enter “2020” as the tax period and leave the date filed blank.

FAQ 56 has a list of addresses and fax numbers where the taxpayer can mail or fax the form to.

Tax Pros in Trouble

Brockton Tax Preparer Indicted for Tax Fraud

The owner of a tax preparation business in Brockton was indicted for preparing false tax returns for others as well as filing a false tax return for himself.

Jose Miguel Spinola, 51, was indicted on 13 counts of preparing false tax returns and one count of filing a false tax return. Spinola was arraigned in federal court in Boston on Friday, June 19, 2020.

As alleged in the indictment, on numerous occasions between 2014 and 2017, Spinola prepared and filed income tax returns for clients that contained false, inflated and incorrect information on his clients’ IRS Form 1040, U.S. Individual Income Tax Returns and attached schedules. Spinola allegedly added false, inflated and ineligible expenses on his clients’ Schedules A for medical and dental expenses and unreimbursed employee business expenses, including claimed meals and entertainment, business miles and work apparel. By inflating Schedule A deductions, Spinola allegedly decreased his clients’ taxable income and effectively increased the clients’ tax refunds. Spinola informed his clients of the total tax refund they would receive from the IRS without telling the clients about the false, inflated, or ineligible expenses Spinola deducted from his clients’ income tax returns.

As part of the investigation, an undercover agent had Spinola prepare and file tax returns. The indictment alleges that Spinola fraudulently deducted false expenses on the undercover agent’s tax return including medical and dental expenses, charitable donations and unreimbursed business expenses – none of which were reported to Spinola by the agent.

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was filed in the U.S. District Court for the Northern District of Illinois, and alleges that those parties prepare false federal income tax returns on which they understate their customers’ tax liabilities by reporting false or exaggerated itemized deductions, sole proprietorship business expenses, and rental real estate losses.

According to the complaint, the Internal Revenue Service interviewed 38 customers of Alpha II Omega Tax, who allegedly stated that they were not self-employed or did not incur the business expenses reported on their income tax returns; had no rental real estate or never suffered the significant rental losses reflected on their tax returns; did not make the donations or expend funds for the employment expenses listed by the defendants; and did not give Rivers and Gary any reason to believe that such deductions were legitimate.

The complaint alleges that, by repeatedly understating their customers’ tax liabilities, the preparers at Alpha II Omega Tax have caused the United States to lose substantial tax revenue. The government contends in the complaint that Rivers and Gary prepared over 2,750 income tax returns between 2016 and 2019, and the returns of just the 38 customers the IRS interviewed reflect an actual tax loss to the IRS of $278,461. The complaint also asks the court to order the defendants to turn over the ill-gotten tax preparation fees they earned while engaging in this fraudulent conduct.

“The Tax Division will work with its IRS partners to shut down return preparers who claim improper or illegal deductions and credits for their customers” said Principal Deputy Assistant Attorney General Zuckerman. “Taxpayers should be vigilant so they do not file tax returns claiming false deductions.”

Return preparer fraud is one of the IRS’s Dirty Dozen Tax Scams and taxpayers seeking a return preparer should remain vigilant. The IRS has information on its website for choosing a tax return preparer and has launched a free directory of federal tax preparers.

In the past decade, the Department of Justice Tax Division has obtained injunctions against hundreds of unscrupulous tax preparers. Information about these cases is available on the Justice Department’s website. An alphabetical listing of persons enjoined from preparing returns and promoting tax schemes can be found on this page. If you believe that one of the enjoined persons or businesses may be violating an injunction, please contact the Tax Division with details.

Alabama Tax Preparer Indicted for Filing False Returns

A federal grand jury in Birmingham, Alabama, returned an indictment today, charging an Alabama tax preparer with filing a false tax return for herself and preparing false tax returns for clients, announced Principal Deputy Assistant Attorney General Richard E. Zuckerman of the Justice Department’s Tax Division and U.S. Attorney Jay E. Town for the Northern District of Alabama.

According to the indictment, Shuntan Renee Rue owned and operated Rue Tax Service, a tax return preparation business in Birmingham, Alabama. From at least 2014 to 2016, Rue allegedly falsified clients’ tax returns by claiming business losses and charitable gifts, as well as medical, unreimbursed employee, and education expenses that her clients did not incur, in order to fraudulently increase their refunds. The indictment further alleges that Rue falsely reported education expenses on her own 2013 tax return.

If convicted, Rue faces a maximum sentence of three years in prison on each count. Rue also faces a period of supervised release, restitution, and monetary penalties.

Ragin Cagin

Report the Death of a Social Security or Medicare Beneficiary

The Social Security Administration (SSA) processes death reports for both Social Security and Medicare recipients.

• What You Need to Do To report a death:

• Provide the deceased person's Social Security number to the funeral director so they can report the death to the SSA.

• Or contact your local Social Security office or call 1-800-772-1213 (TTY 1-800-325-0778) to make the report. • Social Security Checks Stop Payment

The SSA can’t pay benefits for the month of a recipient’s death. That means if the person died in July, the check received in August (which is payment for July) must be returned.

If the payment is by direct deposit, notify the financial institution as soon as possible so it can return any payments received after death.

Family members may be eligible for Social Security survivors benefits when a person getting benefits dies.

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Settlement Days events virtual in May 2020.

Settlement Days events are coordinated efforts to resolve cases in the United States Tax Court (Tax Court) by providing taxpayers not represented by counsel the opportunity to receive free tax advice from Low Income Taxpayer Clinics (LITCs), American Bar Association (ABA) volunteer attorneys and other pro bono organizations. Taxpayers can also discuss their Tax Court cases and resolve related tax issues with members of the IRS Office of Chief Counsel, the Independent Office of Appeals and Collection. By doing so, unrepresented taxpayers are often able to amicably settle their tax disputes without a trial.

In response to office closures and social distancing requirements, the Office of Chief Counsel quickly shifted its Settlement Days event to a virtual environment. Settlement Days events have traditionally been held in-person, requiring LITC staffers, pro bono attorneys and taxpayers to travel to a designated meeting location. Virtual Settlement Days events take advantage of WebEx audio-visual conferencing software to allow taxpayers to join events from any location, including their homes.

The Office of Chief Counsel first announced its shift to Virtual Settlement Days on May 5, 2020. (See IR-2020-87.) As part of that, Virtual Settlement Days events were held on May 9 in Detroit in conjunction with the University of Michigan Law School LITC, and on May 21 in Atlanta in conjunction with the North Georgia Low Income Taxpayer Clinic.

“The response to these programs has been overwhelming, and it encouraged us to expand this initiative to help more people,” said IRS Chief Counsel Mike Desmond.

The Detroit office expanded its event to eight days. The Atlanta office expanded to two events, one in May and one in June. Between them, the Detroit and Atlanta offices resolved the cases of more than 50 taxpayers. Now, the Office of Chief Counsel is expanding Virtual Settlement Days to other offices and hosting events more frequently.

“Virtual settlement days represent a continuing effort by the IRS to deliver meaningful resolution options to taxpayers, especially during these difficult times,” IRS Commissioner Chuck Rettig said. “Virtual options represent an addition to traditional methods of communication and resolution, not a replacement. The IRS strives to assist every taxpayer, including many who do not have the ability to interact in a virtual environment. The IRS is open to innovative approaches like the virtual settlement days to help people. We welcome comments from taxpayers and others regarding additional methods by which the IRS can ease the burdens on people of our country facing tax issues.”

The Office of Chief Counsel’s Los Angeles office held its first Virtual Settlement Day on May 26, and now also has events scheduled for June 5, 9, 19 and 23, as well as July 7, 17 and 21. The Los Angeles office is working with six different LITCs to support these events. The Atlanta office also has additional

Be certain to check the Social Security web site, ssa.gov frequently for benefit information.

Jerry

Taxpayer Advocacy

IRS Provides Information on Effect of COVID-19 on Audits

On its website, IRS has posted information on the effect of COVID-19 on its audits.

Q. What happens to open audits and how will IRS reach out to taxpayers?

A. Due to the operational changes from the COVID-19 crisis, IRS suspended face-to-face meetings related to current field, office and correspondence examinations. However, it is expanding its secure electronic communications to support taxpayers and may reach out by email or phone in addition to mail to work current cases. IRS will generally not start new field, office, and correspondence examinations until July 15, 2020. However, IRS may start new examinations when deemed necessary to protect the government's interest in preserving the applicable statute of limitations.

Q. What audits could IRS begin during this time?

A. IRS will continue to work taxpayer-initiated requests, e.g., requests made through the Taxpayer Advocate Service and taxpayer claims for refunds. IRS will also continue to open new exams related to abusive tax schemes, like micro-captive insurance and syndicated conservation easements.

Q. Unique situations arise with audits. How will IRS handle those?

A. Particularly for some corporate and business taxpayers, IRS understands that there may be instances where the taxpayer's desire is to begin an examination while people and records are available and respective staffs have capacity. In those instances, when it's in the best interest of both parties and appropriate personnel are available, IRS may initiate activities to move forward with an examination – understanding that COVID-19 developments could later reduce activities for an agreed period.

IRS Chief Counsel Goes Virtual with National Settlement Days; Helps Dozens of Taxpayers Settle Their Tax Court Cases

The Internal Revenue Service Office of Chief Counsel is expanding its Virtual Settlement Days program after the tremendous success achieved by three offices that took

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events scheduled for June 16 and 17.

The Office of Chief Counsel’s Washington, D.C., office is inviting more than 60 unrepresented taxpayers to participate in its first Virtual Settlement Day on June 20, in conjunction with Catholic University Law Columbus Community Legal Services Low-Income Tax Clinic, American University Law Janet R. Spragens Federal Tax Clinic, and Morgan Lewis Center for Public Interest Tax Law and Legal Services of Northern Virginia.

“The success of Virtual Settlement Days is only possible thanks to the strong partnership between the Office of Chief Counsel, LITCs and pro bono attorneys,” Desmond said.

The Office of Chief Counsel looks forward to organizing more Virtual Settlement Days in the coming weeks. The IRS encourages unrepresented taxpayers with active Tax Court cases to contact the assigned Chief Counsel attorney or paralegal about participating in a Virtual Settlement Days event. If a taxpayer’s case is currently under consideration by the IRS Independent Office of Appeals, the taxpayer should contact the assigned Appeals Officer to discuss case resolution.

IRS Updates Information on Delinquent Debt/passport Certification and Revocation

On its website, IRS has provided updated information on its certifications and decertifications of delinquent taxpayer debt as part of a program under which the State Department can revoke the taxpayer's passport.

Having a "seriously delinquent tax debt" is, unless an exception applies, grounds for denial, revocation, or limitation of a passport by the State Department. If IRS determines that a taxpayer has a serious delinquent tax debt, it will "certify" that debt to the State Department. (Code Sec. 7345(a)) A taxpayer who has been certified cannot be issued a U.S. passport and such a taxpayer who has a passport may have his passport revoked. (Travel.state.gov)

In previous announcements, IRS has said that it was delaying new certifications of taxpayers who are considered seriously delinquent and that existing certifications would remain in place unless the taxpayer's tax situation changes.

IRS is still not issuing new certifications to the Department of State. Existing certifications will remain in place until a decertifying condition such as an Installment Agreement, or a determination that a liability is currently not collectible due to hardship, is met. To request decertification, taxpayers may call the phone number listed on their CP 508C notice (855-519-4965) to resolve their seriously delinquent debt.

IRS notes that it may be difficult to contact a representative at this time.

IRS is currently unable to process expedited passport decertification requests. The Department of State advised that

passport services have been temporarily suspended except for life or death emergencies. Taxpayers should contact the Department of State directly.

IRS Continues Efforts to Address Income Verification Backlog

In its IVES Program newsletter, IRS has announced that is continuing to work on its backlog of transcript requests by financial businesses as part of its Income Verification Express Service (IVES). It also announced that it is opening its IVES fax lines for three days for new requests.

The IVES program is used by mortgage lenders and others within the financial community to confirm the income of a borrower during the processing of a loan application. IRS provides a return transcript to these third parties with the consent of the taxpayer. (IRS website - Income Verification Express Service)

In March, IRS announced that it was temporarily suspending acceptance of new IVES requests.

IRS later announced that it was going through previously submitted IVES request and that, for the period from May 29, 2020 though June 1, 2020, it accepted a limited number of new requests

IRS is continuing to work on its existing IVES inventory as it continues its efforts to return operations to normal.

It is also ready to accept up to 50% of additional work for each participant and is opening its fax lines for three days starting on Monday, June 8, 2020 at 11 a.m. EDT until 11 a.m. EDT on Thursday, June 11, 2020.

IRS notes that IVES participants must use the fax number associated with their assigned site. IRS will be sending acknowledgements out to confirm the work it has received from each participant and therefore reminds participants not to not send duplicate requests.

IRS also reminds participants that it still has limited staffing, so processing time will be delayed.

IRS Offers Settlement for Syndicated Conservation Easements; Letters Being Mailed to Certain Taxpayers with Pending Litigation

The Internal Revenue Service Office of Chief Counsel has announced a time-limited settlement offer to certain taxpayers with pending docketed Tax Court cases involving syndicated conservation easement transactions. Taxpayers eligible for this offer will be notified by letter with the applicable terms.

The settlement offer would bring finality to these taxpayers with respect to the syndicated conservation easement issues in their docketed U.S. Tax Court cases. The settlement requires a concession of the income tax benefits claimed by

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the taxpayer and imposes penalties.

“The IRS will continue to actively identify, audit and litigate these syndicated conservation easement deals as part of its vigorous and relentless effort to combat abusive transactions,” said IRS Commissioner Chuck Rettig. “These abusive transactions undermine the public's trust in private land conservation and defraud the government of revenue. Ending these abusive schemes remains a top priority for the IRS."

The IRS recognizes the important role of conservation easement deductions in incentivizing land preservation for future generations. However, abusive syndicated conservation easement transactions have been of concern to the IRS for several years. In Notice 2017-10, the IRS identified certain syndicated conservation easement transactions as tax avoidance transactions and provided that such transactions (and substantially similar transactions) are listed transactions for purposes of Treasury Regulation § 1.6011-4(b)(2) and §§ 6111 and 6112 of the Internal Revenue Code. Also, in 2019, the IRS added syndicated conservation easement transactions to its annual “Dirty Dozen” list of tax scams. Taxpayers should note that the U.S. Tax Court has held in the government’s favor in several opinions and orders in syndicated conservation easement cases. The IRS realizes that some promoters may tell their clients that their transaction is “better” than or “different” from the transactions previously rejected by the Tax Court and that it may be better for the client to litigate than accept this resolution. When deciding whether to accept the offer, the IRS encourages taxpayers to consult with independent counsel, meaning a qualified advisor who was not involved in promoting the transaction or handpicked by a promoter to defend it.

In listed syndicated conservation easement structures, promoters syndicate ownership interests in real property through partnerships, using promotional materials to suggest that prospective investors may be entitled to a share of a conservation easement contribution deduction that equals or exceeds two and one-half times the investment amount. The promoters obtain an appraisal that greatly inflates the value of the conservation easement based on a fictional and unrealistic highest and best use of the property before it was encumbered with the easement. After the investors invest in the partnership, the partnership donates a conservation easement to a land trust. Investors in the partnership then claim a deduction based on an inflated value. The investors typically claim charitable contribution deductions that grossly multiply their actual investment in the transaction and defy common sense.

The IRS has developed a comprehensive, coordinated enforcement strategy to address abusive syndicated conservation easement transactions and has also been working closely with the U.S. Department of Justice to shut down the promotion of them. The IRS will continue to disallow the claimed tax benefits, asserting civil penalties to the fullest extent, considering criminal sanctions in appropriate

cases, and continuing to pursue litigation of the cases that are not otherwise resolved administratively. This syndicated conservation easement resolution should not be deemed to have any impact on the potential criminal exposure, investigation and/or prosecution of any individual or entity that participated in or assisted or advised others in participating in a syndicated conservation easement transaction in any manner whatsoever.

In addition, part of the IRS’ strategy is the creation of two new offices that are actively investigating these transactions: the Promoter Investigation Coordinator and the Office of Fraud Enforcement. For certain taxpayers involved in syndicated conservation easements, the IRS Office of Chief Counsel has decided, however, to offer taxpayers an opportunity to resolve certain docketed cases on standardized terms. The settlement offer will be sent by mail to those eligible. Among the key terms of the settlement offer:

• The deduction for the contributed easement is disallowed in full.

• All partners must agree to settle, and the partnership must pay the full amount of tax, penalties and interest before settlement.

• “Investor” partners can deduct their cost of acquiring their partnership interests and pay a reduced penalty of 10 to 20% depending on the ratio of the deduction claimed to partnership investment.

• Partners who provided services in connection with ANY Syndicated Conservation Easement transaction must pay the maximum penalty asserted by IRS (typically 40%) with NO deduction for costs.

Taxpayers should not expect to settle their docketed Tax Court cases on better terms. Based on cases the Independent Office of Appeals has encountered to date, and the existing state of the law, taxpayers should not later expect a better result than what is provided in this settlement offer.

“With this announcement, we encourage taxpayers and their advisors to take a hard, realistic look at their cases. They should carefully review this settlement offer. We believe this is clearly the best option for them to pursue given all of these factors,” said IRS Chief Counsel Michael J. Desmond. “Those who choose not to accept the offer should keep in mind the Office of Chief Counsel will continue to vigorously litigate their cases to the fullest extent possible.”

IRS Updates Third-party Contact Notice Procedures for Collecting Debtor’s Taxes

The IRS has updated its procedures in the Internal Revenue Manual (IRM) for collecting debtors’ delinquent taxes to account for the changes made to the third-party notice requirements by the Taxpayer First Act (P.L. 116-25).

The IRS sometimes contacts third parties about a taxpayer's

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tax situation. The IRS generally uses third-party contacts as a last resort to resolve unanswered questions about matters such as the taxpayer's assets or address. (IR 2000-8) With certain exceptions, an IRS officer or employee can't contact a third party regarding a taxpayer's tax liability, unless that contact occurs during a period specified in a notice (“third-party contact notice”) that:

(1) informs the taxpayer that contacts with persons other than the taxpayer are intended to be made during a specified period (Code Sec. 7602(c)(1)(A)), and

(2) is provided no later than 45 days before the beginning of that period (“specified period of contact”). (Code Sec. 7602(c)(1)(B)).

The specified period of contact in the notice may not exceed one year. (Code Sec. 7602(c)(1)) Under Code Sec. 7602(c)(1), the IRS may not issue a third-party contact notice unless the IRS intends, when the notice is issued, to contact third parties during the period specified in the notice. A “third-party contact” is a communication that:

(1) is initiated by an IRS employee;

(2) is made to a person other than the taxpayer;

(3) is made with respect to the determination or collection of the taxpayer's tax liability;

(4) discloses the identity of the taxpayer being investigated; and

(5) discloses the IRS employee's association with the IRS. (Reg § 301.7602-2(b))

The IRS must periodically provide the taxpayer with a record of persons contacted with respect to the determination or collection of the tax liability of such taxpayer. Such record must also be provided upon the taxpayer’s request. (Code Sec. 7602(c)(2))

The IRS previously updated its third-party contact notice procedures in August 2019. See IRS updates third-party contact notice procedures to comply with Taxpayer First Act.The IRS has updated its procedures in IRM 5.9.3.12.1 for collecting debtors’ delinquent taxes to account for the changes made to the third-party contact notice requirements in Code Sec. 7602(c)(1) by the Taxpayer First Act. The guidance notes the following:

…The IRS will wait at least 45 days after sending notice to the taxpayer before initiating contact with a third party.

…Contacts made during litigation (“litigation exception”), including bankruptcy proceedings, relating to a matter being litigated are not third-party contacts and do not require completion of Form 12175, Third-Party Contact Report Form. …IRS employees should contact IRS Chief Counsel with

any questions regarding the litigation exception.

…Contacts made during a criminal investigation generally are not subject to the third-party contact notice requirements. A criminal investigation is initiated when an administrative referral based on a firm indication of fraud or other criminal conduct is made to IRS Criminal Investigation (CI). However, third-party contacts to develop cases for referral to CI are subject to the third-party contacts and must be reported on Form 12175.

…A summons issued for examination or collection purposes to a third party with respect to an identified taxpayer (“third-party summons”) is a third-party contact subject to the third-party contact notice requirements.

…A release of levy is a third-party contact and, unless approved by the taxpayer/debtor, must be reported on Form 12175. Levies should be released immediately, even if no advance third-party contact notice has been given to the taxpayer, to avoid violation of the automatic stay in bankruptcy. (After a bankruptcy petition has been filed, the automatic stay in bankruptcy stops all creditors, including the IRS, from collecting debts from the debtor).

…IRS employees are required to record all third-party contacts on the date the contact is made (or as soon as possible thereafter) on Form 12175. Multiple contacts with the same third-party on different dates require a separate Form 12175 for each contact. When Form 12175 is completed, it is forwarded to the Third-Party Contact Coordinator. The IRS retains copies of Form 12175 for ten years.

…IRS employees must use Letter 3164-B, Third-Party Contact Letter (revised July 2019 or later), to notify the taxpayer before a contacting a third-party about collecting a tax assessed against such taxpayer.

…The third-party contact notice requirements do not apply to any contacts the taxpayer authorizes. IRS employees may use Form 12180, Third-Party Contact Authorization Form, to document the taxpayer’s authorization.

...As of August 15, 2019, Publication 1, Your Rights as a Taxpayer, no longer satisfies the third-party contact notice requirement in Code Sec. 7602(c)(1).

IRS Policy on Closing Letters When There Is Bankruptcy Stay

In a memo to its employees, IRS Appeals Division (Appeals) has stated that its policy with respect to issuing closing letters in certain cases where there is a bankruptcy stay, initiated in 2018, continues to apply.

Appeals must hold a Collection Due Process hearing (CDP hearing) for the filing of a notice of federal tax lien if the taxpayer requests one in writing and states the grounds for the requested hearing. (Code Sec. 6320(b)(1) A similar rule

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Administrative Order 2020-02 contains sample orders, such as the new standing Pretrial Order, and notices, such as the new Notice Setting Case for Trial, that incorporate the Court’s new remote proceeding procedures. The sample orders and notices will also be posted on the Court’s website under “Forms.”

According to the new Pretrial Order, litigants may appear for remote proceedings by telephone or by video using Zoomgov, which doesn’t require a personal Zoom account and is available to use free of charge. More information about how to use Zoomgov to appear at a Tax Court proceeding can be found on the Tax Court’s website.

Foreign Tax

COVID-19 Relief for Entities with Income Not Effectively Connected to US Trade or Business

On the IRS web site the IRS has said that nonresident aliens and foreign corporations (and partnerships in which either is a partner), that do not have a U.S. trade or business (USTB) due to IRS-provided relief from COVID-19 travel disruptions, will not be subject to the 30% tax on US-source income that is not effectively connected to a USTB.

Nonresident alien individuals who perform services or other activities in the United States, and foreign corporations who employ individuals or engage individuals as agents to perform services or other activities in the United States, may be considered engaged in a USTB. Generally, a nonresident alien or foreign corporation that is engaged in a USTB is taxable on its business income connected to that USTB. (Code Sec. 871(b); Code Sec. 882(a))

If a US income tax treaty applies, however, the nonresident alien individual or foreign corporation generally will not be liable to tax on the income of its USTB (i.e., business profits) unless the business is conducted through a Reg. § 521.104(b)(1) permanent establishment in the US (PE).

In April, the IRS issued two FAQs ("the FAQs") regarding USTBs and PEs. The first FAQ says that a nonresident alien,

applies with respect to the filing of a notice of levy. (Code Sec. 6330(b)(1))

A taxpayer who does not make a timely request for a CDP hearing may request an "equivalent hearing" with Appeals. (Reg. § 301.6330-1(i)(1))

IRS sometimes issues closing letters that provide confirmation that it has closed its examination of a taxpayer's return.

Consistent with the procedure it has been using since 2018, IRS will not issue closing letters for Collection Due Process/Equivalent Hearing (CDP/EH) cases when a bankruptcy automatic stay is in effect. Appeals will not attempt to resolve CDP/EH cases when the bankruptcy automatic stay is in effect. Appeals employees will instead place these cases in suspense.

Tax Court Resumes Accepting Requests for Copies of Court Records from Non-parties

In a Press Release, the Tax Court has announced that on June 1, 2020, it resumed accepting requests for copies of Court records from non-parties.

According to the Press Release, until further notice, all requests for copies must be made by calling the Records Department at (202) 521-4629 and all requests for copies will be fulfilled electronically by email.

The Court charges $0.50 per page for copies of Court records, with a per-document cap of $3.00.

Litigants registered for electronic access can continue to electronically access and view documents in their own case files without charge. Litigants who are not already registered can register for electronic access (eAccess) to their own Tax Court records by calling the Admissions Department at (202) 521-4629 or by emailing Admissions@ustaxcourt.gov.

Tax Court Will Conduct Proceedings Remotely

In a Press Release, the Tax Court has announced that, until further notice, it will be conducting its proceedings remotely.

The Court has also released Administrative Order 2020-02, which provides the Court’s remote proceedings procedures and Administrative Order 2020-03, which provides the Court's procedures for filing a Limited Entry of Appearance.

According to the Press Release, the Court adopted these remote proceeding procedures because of ongoing uncertainties with COVID-19 and the Court’s desire to continue essential operations.

The Court will provide public access to the Court’s remote proceedings via real-time audio with dial-in information for each session posted on the Court’s website.

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foreign corporation, or a partnership in which either is a partner ("Affected Person") may choose an uninterrupted period of up to 60 calendar days, beginning on or after February 1, 2020, and on or before April 1, 2020 (the COVID-19 Emergency Period), during which services or other activities conducted in the US will not be taken into account in determining whether the nonresident alien or foreign corporation is engaged in a USTB, provided that such activities were performed by one or more individuals temporarily present in the US and would not have been performed in the US but for COVID-19 travel disruptions.

The second FAQ says that during an Affected Person's COVID-19 Emergency Period, services or other activities performed by one or more individuals temporarily present in the US will not be taken into account to determine whether the nonresident or foreign corporation has a PE, provided that the services or other activities of these individuals would not have occurred in the US but for COVID-19 travel disruptions.

In general, there is a 30% tax imposed on US-source income that (1) is not effectively connected with the conduct of a USTB and (2) is received by a nonresident alien individual or foreign corporation. (Code Sec. 871(a), Code Sec. 881(a))

An Affected Person's income earned during the COVID-19 Emergency Period will not be subject to the 30% tax imposed under Code Sec. 871(a) or Code Sec. 881(a) solely because the Affected Person is not treated as having a USTB or PE under the FAQs.

FAQs for Aliens Claiming Medical Condition or Travel Exceptions to Substantial Presence Test

IRS has issued FAQs for nonresident aliens who wish to avail themselves of the Medical Condition Exception or the Medical Condition Travel Exception to the substantial presence test, i.e., the test under which nonresident aliens are taxed as U.S. residents.

Background—the Medical Condition Exception to the substantial presence test. Unless an exception applies, alien individuals who are not lawful permanent residents (i.e., green-card holders), and who meet the substantial presence test for a given calendar year by virtue of having spent enough time in the U.S. (days of presence), are generally treated as U.S. residents for that year. (Code Sec. 7701(b)(1)(A)(ii))

When applying the substantial presence test, an alien individual may exclude certain days of physical presence in the U.S., including if the individual qualifies for the Medical Condition Exception. The MCE provides that an alien individual is not treated as present in the U.S. on days when the individual is unable to leave the U.S. because of a medical condition that arose while the individual was present in the U.S. (Reg. §301.7701(b)-3(c)(1))

Alien individuals who are eligible to claim the Medical Condition Exception generally must file Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, to obtain

this exception, which requires a signed statement from a physician or other medical official that the alien individual was unable to leave the United States due to a medical condition or medical problem. (Reg. §301.7701(b)-3(c))

Rev Proc 2020-20, 2020-20 IRB, provides relief for certain nonresident alien individuals stranded in the United States due to the COVID-19 Emergency; it describes procedures for Eligible Individuals to claim the COVID-19 Medical Condition Travel Exception, pursuant to which an Eligible Individual can exclude a single period of up to 60 consecutive calendar days of presence in the United States for purposes of applying the substantial presence test. See COVID-19 medical condition travel exception to substantial presence test.

FAQs on the Medical Condition Exception and the Medical Conditional Travel Exception.

Q1. Will an alien individual who intended to but is or was unable to leave the United States on the individual's planned departure date due to a medical condition or medical problem in calendar year 2020 be required to obtain a physician's statement as required by Part V of Form 8843?

A1. Any alien individual who is eligible and fulfills the requirements to claim the Medical Condition Exception may file the Form 8843 without a physician's statement to cover a single period of up to 30 consecutive calendar days in calendar year 2020 (30-Day Medical Condition). This FAQ does not modify the eligibility requirements to claim the Medical Condition Exception, only the procedures for claiming the exception on Part V of Form 8843 and only with respect to a single period of up to 30 consecutive calendar days of presence in the United States in calendar year 2020.

The exemption from the Form 8843 requirement to obtain a physician's statement for a 30-Day Medical Condition can be claimed in addition to the relief provided in Rev Proc 2020-20. The instructions to Form 8843 for 2020 will reflect the 30-Day Medical Condition contemplated by this FAQ.

Q2. What types of documentary evidence should alien individuals retain to support their eligibility for the 30-Day Medical Condition?

A2. In lieu of a physician's statement, alien individuals claiming the 30-Day Medical Condition should retain documentary evidence that substantiates their medical condition, their inability to leave due to the medical condition, and the period of the medical condition, such as (i) evidence of consultations with a heath care provider (e.g., a phone bill or a text message or email from the health care provider), (ii) receipts related to healthcare purchases, (iii) evidence of canceled or changed travel reservations, or (iv) official medical records or written healthcare correspondence that the individual received (e.g., automated responses instructing an individual to self-isolate). These documents should not be submitted with the Form 8843, but alien individuals claiming the 30-Day Medical Condition should be prepared to produce these records if requested by IRS.

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Form I-94 showing the individual's entries into the United States, hotel receipts, or travel reservations, including confirmation of changes or cancellations). If the Eligible Individual was actually ill or advised to self-quarantine in the United States during the individual's excluded days under the revenue procedure, he or she may also retain the documents described in FAQ 2 to demonstrate presence in the U.S. through U.S.-based medical records and treatments, though failure to document an actual illness will not affect eligibility to claim relief under Rev Proc 2020-20.

An Eligible Individual who does not qualify for the presumption of an intent to leave the United States outlined in section Rev Proc 2020-20, Sec. 4.02 (meaning, the individual has applied, or otherwise taken steps, to become a lawful permanent resident of the United States but is not yet a lawful permanent resident), should also retain any documents that may support a "facts and circumstances" analysis of the Eligible Individual's intent to leave the U.S. under Reg § 301.7701(b)-3(c)(2). These documents should not be submitted with the Form 8843, but Eligible Individuals claiming relief under Rev Proc 2020-20 should be prepared to produce these records if requested by IRS.

Lists of Countries with 2020 Nonresident Alien Interest Reporting Requirements

Rev Proc 2020-15, 2020-23 IRB

In a Revenue Procedure, IRS has updated two lists of countries with which the U.S. has in effect an agreement that requires payors to report certain deposit interest paid to nonresident alien individuals who are residents of the other country under Reg. § 1.6049-8(a) and Reg. § 1.6049-4(b)(5). One list is of countries with which the U.S. has in effect an income tax or other treaty or a bilateral agreement; the other is of countries with which IRS has determined that an automatic exchange of information is appropriate.

Reg. § 1.6049-4(b)(5) and Reg. § 1.6049-8(a) require the reporting of certain deposit interest paid to nonresident alien individuals. Reg. § 1.6049-4(b)(5) provides that, in the case of interest aggregating $10 or more paid to a nonresident alien individual (as defined in Code Sec. 7701(b)(1)(B)) that is reportable under Reg. § 1.6049-8(a), the payor is required to make an information return on Form 1042-S (Foreign Person's U.S. Source Income Subject to Withholding) for the calendar year in which the interest is paid. Interest that is reportable under Reg. § 1.6049-8(a) is interest described in Code Sec. 871(i)(2)(A) that relates to a deposit maintained at an office within the U.S. and that is paid to a resident of a country that is identified, in an applicable revenue procedure (see Reg. § 601.601(d)(2)) as of December 31 prior to the calendar year in which the interest is paid, as a country with which the U.S. has in effect an income tax or other convention or bilateral agreement relating to the exchange of tax information within the meaning of Code Sec. 6103(k)(4).

Rev Proc 2012-24, 2012-20 IRB 913, identifies the countries with which the U.S. has in effect an income tax or other

Q3. How should alien individuals who only claim the 30-Day Medical Condition complete Part V of Form 8843 (the section of the form applicable to individuals claiming the Medical Condition Exception)?

A3. For those claiming a 30-Day Medical Condition without claiming relief under Rev Proc 2020-20 or any other excluded days pursuant to the Medical Condition Exception, the alien individual should write "30-Day Medical Condition" and then describe in detail the 30-Day Medical Condition that prevented the alien individual from leaving the US under Line 17a in Part V of Form 8843. When determining the information to include in line 17a, an alien individual should provide relevant information so that the individual can clearly demonstrate qualification for the Medical Condition Exception if the Form 8843 is later reviewed by IRS with the corresponding documentary evidence discussed in FAQ 2, as applicable. Lines 17b and 17c should be completed consistently with the form's instructions. Line 18 of the form should be left blank.

As described in FAQ 2, third-party documentary evidence of an alien individual's medical condition should not be submitted with the form but should be retained by the alien individual.

Q4. How should alien individuals who claim multiple Medical Condition Exceptions complete Part V of Form 8843?

A4. An alien individual may be able to claim multiple Medical Condition Exceptions and should file a single Form 8843 enumerating all the applicable Medical Condition Exceptions on line 17a. The alien individual should attach a separate statement with respect to each Medical Condition Exception being claimed along with the relevant corresponding information as outlined in Rev Proc 2020-20, in FAQ 3, or the existing instructions, as applicable. As an example, line 17a could read: "Condition 1: Covid-19 Medical Condition Travel Exception; Condition 2: 30-Day Medical Condition,"

Lines 17b and 17c of Part V should be left blank, but the relevant information for each applicable exception, as described in Rev Proc 2020-20 and in FAQ 3, along with the dates that would otherwise be reflected under line 17b and line 17c, would be included in each separate statement. Neither of these conditions require a physician's statement, and thus line 18 should be left blank.

Note, however, if an alien individual is also claiming a Medical Condition Exception that requires a physician's statement, the signature and relevant information from line 18 should be included in the separate attachment related to that medical condition.

Q5. What types of documentary evidence should Eligible Individuals retain to support their eligibility for the relief provided under Rev Proc 2020-20?

A5. An Eligible Individual claiming relief under Rev Proc 2020-20 should retain evidence of the individual's presence in the United States during the individual's claimed COVID-19 Emergency Period (such as a Customs and Border Protection

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Passing a background check is an addition to current requirements. To obtain a CTEC registration, applicants must also pass a 60-hour qualifying tax education course, purchase a $5,000 surety bond, plus obtain a Preparer Tax Identification Number (PTIN) from the Internal Revenue Service. After their initial registration, CTEC-registered tax preparers (CRTPs) are required to complete 20 hours of continuing education each year.

The background checks will only apply to new applicants, however, current CRTPs who let their status expire and decide to re-register, would be subject to the background check.

Phase one of the bill began last year by requiring CRTPs to report claims against their bonds to CTEC. It also required CTEC to publicly list any disciplinary actions taken against a CRTP by the council, including misconduct that results in suspending or revoking a registration. All actions taken against a CRTP, including bond claims, are posted on the CTEC website.

“It’s always been about protecting taxpayers,” DiMaggio said. “This bill takes it to a new level.”

CTEC is a nonprofit organization established in 1997 by the California State Legislature to protect taxpayers. Only attorneys, certified public accountants (CPAs) and enrolled agents (EAs) are exempt from CTEC registration.

California Budget Includes Major Revenue Raisers and Other State Tax Law Changes

By Chris Micheli

As part of the 2020-21 California State budget, where the state’s fiscal year begins July 1, the Legislature passed and Governor Newsom is expected to sign AB 85 (Committee on Budget), which makes numerous tax law changes, including suspension of the net operating loss deduction and a $5 million cap on the use of business tax credits for three years.

The following is a review of the provisions of AB 85, based upon the just over two dozen sections of the bill:

Section 1 – CRTC Section 6295 is added

This bill, when a vehicle required to be registered under the Vehicle Code is sold at retail on and after January 1, 2021, by any dealer holding a license issued pursuant to the Vehicle Code, except a new motor vehicle dealer, requires the dealer to pay the applicable sales tax to the Department of Motor Vehicles acting for and on behalf of the California Department of Tax and Fee Administration within 30 days from the date of the sale.

The bill imposes specified penalties if the dealer makes an application to the Department of Motor Vehicles that is not timely and imposes penalties and interest if the dealer fails to make an application to the Department of Motor Vehicles, fails to pay the sales tax, or fails to timely file the return required by

convention or bilateral agreement relating to the exchange of information within the meaning of Code Sec. 6103(k)(4) pursuant to which the U.S. agrees to provide, as well as receive, information. Rev Proc 2012-24 has been updated several times, most recently by Rev Proc 2018-36, 2018-38 IRB.

Section 3 of the Revenue Procedure adds Singapore to the list of countries with which the reporting requirements of Reg. § 1.6049-8(a) and Reg. § 1.6049-4(b)(5) apply.

Section 4 of the Revenue Procedure does not add any new countries to the list of approved countries that have an automatic exchange relationship with respect to the information in Reg. § 1.6049-8(a) and Reg. § 1.6049-4(b)(5).

For purposes of the reporting requirements of Reg § 1.6049-4(b)(5), the list of jurisdictions to which the reporting requirement applies is effective: (i) with respect to the jurisdiction newly added to such list, for interest paid on or after January 1, 2021; and (ii) with respect to the other listed jurisdictions, for interest paid on or after January 1 of the calendar year following the issuance of the revenue procedure (as cited in Section 3) first identifying the jurisdiction as having in effect an agreement with the United States as described in Reg § 1.6049-8(a).

The list of jurisdictions with which IRS exchanges tax data is effective from the date of issuance of the revenue procedure with respect to information reported to the IRS pursuant to Reg § 1.6049-4(b)(5) and Reg §1.6049-8(a) for any tax year for which the jurisdiction was included in the list in Section 3.

State News of NoteCalifornia Assembly Bill 3143 Enters Phase Two, Aiming to Increase the Protection of Taxpayers Against Fraud

Starting July 1st, new applicants who would like to register as a tax preparer with the California Tax Education Council (CTEC) will be required to pass a criminal background check and submit fingerprint images for the Department of Justice to process before CTEC can determine eligibility to register.

California Law Requires New Tax Preparers Pass Background Checks

“California is one of only a handful of states to tackle this kind of oversight. It’s definitely been an evolving process,” said Susie DiMaggio, chair of CTEC, a state-mandated nonprofit organization that manages the registration of 40,000 tax preparers.

The new requirement is phase two of California Assembly Bill 3143, also known as “The Tax Preparation Act,” which aims to increase the protection of taxpayers by adding new provisions and responsibilities for the council, as well as tax preparers registered with CTEC.

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the Sales and Use Tax Law with the California Department of Tax and Fee Administration.

Section 2 – CRTC Section 6363.9 is amended

This bill extends the sales and use tax exemptions for the sale of, or the storage, use, or other consumption of, diapers for infants, toddlers, and children until July 1, 2023.

Section 3 – CRTC Section 6363.10 is amended

This bill extends the sales and use tax exemptions for the sale of, or the storage, use, or other consumption of, menstrual hygiene products until July 1, 2023.

Section 4 – CRTC Section 6902.5 is amended

For those amounts for which an irrevocable election is made by taxpayers in lieu of claiming tax credits, beginning on or after January 1, 2020, and before January 1, 2023, there applies to those in-lieu credit amounts that do not exceed five million dollars ($5,000,000) for that taxable year.

Section 5 – CRTC Section 12209 is added

This bill provides that for each taxable year beginning on or before January 1, 2020, and before January 1, 2023, the total credits otherwise allowable, except as specified, for the taxable year may not reduce the taxes imposed by those laws by more than $5,000,000. The bill provides that the amount of any credit otherwise allowable that is not allowed due to the application of this bill will remain a credit carryover amount. The bill also provides that the carryover period for any credit that is not allowed due to the application of this bill will be increased by the number of taxable years the credit or any portion thereof was not allowed.

Section 6 – CRTC Section 17039.3 is amended

For taxpayers required or not required to be included in a combined report, the total of all business credits otherwise allowable under any provision of Chapter 2 (commencing with Section 17041), including the carryover of any business credit under a former provision of that chapter, for the taxable year shall not reduce the “net tax,” as defined in Section 17039, by more than five million dollars ($5,000,000).

For purposes of this section, “business credit” means a credit allowable under any provision of Chapter 2 (commencing with Section 17041) other than the following credits:

(1) The credit allowed by Section 17052 (relating to credit for earned income).

(2) The credit allowed by Section 17052.1 (relating to credit for young child).

(3) The credit allowed by Section 17052.6 (relating to credit for household and dependent care).

(4) The credit allowed by Section 17052.25 (relating to credit for adoption costs).

(5) The credit allowed by Section 17053.5 (relating to renter’s tax credit).

(6) The credit allowed by Section 17054 (relating to credit for personal exemption).

(7) The credit allowed by Section 17054.5 (relating to credit for qualified joint custody head of household and a qualified taxpayer with a dependent parent).

(8) The credit allowed by Section 17054.7 (relating to credit for qualified senior head of household).

(9) The credit allowed by Section 17058 (relating to credit for low-income housing).

(10) The credit allowed by Section 17061 (relating to refunds pursuant to the Unemployment Insurance Code).

Section 7 – CRTC Section 17053.95 is amended

This bill extends the carryover period from 6 taxable years to 9 taxable years for the motion picture tax credit.

Section 8 – CRTC Section 17276.23 is added

This bill, subject to certain exceptions related to a taxpayer’s income, disallows a net operating loss deduction for any taxable year beginning on or after January 1, 2020, and before January 1, 2023, and extends the carryover period for a net operating loss deduction disallowed by that provision.

Section 9 – CRTC Section 17935 is amended

This bill, for taxable years beginning on or after January 1, 2020, and before January 1, 2024, in which a specified appropriation is made in any budget measure, exempts a limited partnership that files, registers, or organizes to do business in this state from the payment of the minimum franchise tax in its first taxable year.

Section 10 – CRTC Section 17941 is amended

This bill, for taxable years beginning on or after January 1, 2020, and before January 1, 2024, in which a specified appropriation is made in any budget measure, exempts a limited liability company that files, registers, or organizes to do business in this state from the payment of the minimum franchise tax in its first taxable year.

Section 11 – CRTC Section 17948 is amended

This bill, for taxable years beginning on or after January 1, 2020, and before January 1, 2024, in which a specified appropriation is made in any budget measure, exempts a limited liability partnership that files, registers, or organizes to do business in this state from the payment of the minimum

46

franchise tax in its first taxable year.

Section 12 – CRTC Section 19533 is amended

The bill requires the Franchise Tax Board to apply funds collected from a debtor toward payment of the Individual Shared Responsibility Penalty and overpaid advanced premium subsidies as a first priority.

Section 13 – CRTC Section 23036 is amended

This bill adds to the ordering of business tax credit usage for taxable years beginning on or after January 1, 2020, and before January 1, 2026, the credit allowed by Section 23636 (relating to the new advanced strategic aircraft credit).

This bill, for taxable years beginning on or after January 1, 2020, and before January 1, 2026, allows the above-described strategic aircraft credit to reduce the regular tax below the tentative minimum tax.

Section 14 – CRTC Section 23036.3 is amended

For taxpayers required or not required to be included a combined report, the total of all business credits otherwise allowable under any provision of Chapter 2 (commencing with Section 17041), including the carryover of any business credit under a former provision of that chapter, for the taxable year shall not reduce the “net tax,” as defined in Section 17039, by more than five million dollars ($5,000,000).

Section 15 – CRTC Section 23695 is amended

This bill extends the carryover period from 6 taxable years to 9 taxable years for the motion picture tax credit.

Section 16 – CRTC Section 24416.23 is amended

This bill, subject to certain exceptions related to a taxpayer’s income, disallows a net operating loss deduction for any taxable year beginning on or after January 1, 2020, and before January 1, 2023, and extends the carryover period for a net operating loss deduction disallowed by that provision.

Section 17 – CRTC Section 61015 is amended

This bill limits the maximum monthly penalty for a responsible individual with an applicable household size of 5 or more individuals to the maximum monthly penalty for a responsible individual with an applicable household size of 5 individuals.

Section 18 – CRTC Section 61020 is amended

This bill makes technical changes to the Individual Shared Responsibility Penalty.

Section 19 – CRTC Section 61030 is amended

This bill makes a clarifying amendment to the Franchise Tax Board rulemaking authority under ISRP.

Section 20 – Vehicle Code Section 426 is amended

This bill makes additional cross references to definition of “New motor vehicle dealer”.

Section 21 – Vehicle Code Section 4456 is amended

This bill requires, for retail sales of vehicles occurring on and after January 1, 2021, a dealer, other than a new motor vehicle dealer, to also submit with the application payment of the applicable sales tax to the Department of Motor Vehicles.

Section 22 – Vehicle Code Section 4750.6 is amended

The bill requires the Department of Motor Vehicles to transmit to the California Department of Tax and Fee Administration all collections of sales tax and penalty within 30 days. The bill requires the Department of Motor Vehicles to withhold the registration or the transfer of registration of any vehicle sold at retail on and after January 1, 2021, to any applicant by any dealer holding a license issued pursuant to the Vehicle Code, other than a new motor vehicle dealer until the dealer pays to the Department of Motor Vehicles the sales tax and any penalties. The bill requires the California Department of Tax and Fee Administration to reimburse the Department of Motor Vehicles for its costs incurred.

Section 23 – Statutes of 2019, Chapter 34, Section 12 is amended

This bill extends the due date of specific Legislative Analyst Office reports to July 1, 2022.

Section 24 – Intent

This bill states it is the intent of the Legislature to apply CRTC Section 41 to specified provisions of this bill.

Section 25 – Section 2230 Waiver

This bill provides that, notwithstanding Section 2230 of the Revenue and Taxation Code, no appropriation is made and the state shall not reimburse any local agencies for sales and use tax revenues lost by them pursuant to this bill as required by that section.

Section 26 – Budget trailer bill

This bill declares that it is to take effect immediately as a bill providing for appropriations related to the Budget Bill.

As a result of the enactment of AB 85, it is estimated that over $4.4 billion in new revenue will be generated in the upcoming fiscal year. Note that the provisions of this bill are retroactive to tax years beginning on or after January 1, 2020 and so taxpayers will need to make adjustments for the loss of the NOL deduction and the limitation on their tax credit usage.

47

IRS Extends July 15, Other Upcoming Deadlines for Tornado Victims in Parts of the South; Provides Other Relief

Victims of the April tornadoes, severe storms and flooding that took place in parts of Mississippi, Tennessee and South Carolina will have until Oct. 15, 2020, to file various individual and business tax returns and make tax payments, the Internal Revenue Service announced today.

The IRS is offering this relief to any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance. Currently, this includes Clarke, Covington, Grenada, Jasper, Jefferson Davis, Jones, Lawrence, Panola and Walthall counties in Mississippi, Bradley and Hamilton counties in Tennessee and Aiken, Barnwell, Berkeley, Colleton, Hampton, Marlboro, Oconee, Orangeburg and Pickens counties in South Carolina.

Taxpayers in localities added later to the disaster area will automatically receive the same filing and payment relief. The current list of eligible localities is always available on the disaster relief page on IRS.gov.

The tax relief postpones various tax filing and payment deadlines that occurred starting on April 12. As a result, affected individuals and businesses will have until Oct. 15, 2020, to file returns and pay any taxes that were originally due during this period. This includes 2019 individual and business returns that, due to COVID-19, were due on July 15. Among other things, this also means that affected taxpayers will have until Oct. 15 to make 2019 IRA contributions.

The Oct. 15 deadline also applies to estimated tax payments for the first two quarters of 2020 that were due on July 15, and the third quarter estimated tax payment normally due on Sept. 15. It also includes the quarterly payroll and excise tax returns normally due on April 30 and July 31.

In addition, penalties on payroll and excise tax deposits due on or after April 12 and before April 27 will be abated as long as the deposits were made by April 27.

The IRS disaster relief page has details on other returns, payments and tax-related actions qualifying for the additional time.

The IRS automatically provides filing and payment relief to any taxpayer with an IRS address of record located in the disaster area. Therefore, taxpayers do not need to contact the agency to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period

are located in the affected area. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227, once normal operations resume. For information on services currently available from the IRS, visit the IRS operations and services page at IRS.gov/Coronavirus.

Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2020 return normally filed next year), or the return for the prior year. This means that taxpayers can, if they choose, claim these losses on the 2019 return they are filling out this tax season.

Be sure to write the appropriate FEMA declaration number on any return claiming a loss. The numbers are 4536 for Mississippi, 4541 for Tennessee and 4542 for South Carolina. See Publication 547 for details.

The tax relief is part of a coordinated federal response to the damage caused by these storms and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

Louisiana Taxpayers Diagnosed With Covid Could See More Relief

Louisiana taxpayers who were diagnosed with Covid-19,or whose tax preparers were, and filed returns or made payments late wouldn’t face penalties or interest under legislation state lawmakers sent to the governor.

The waivers would apply to all 2019 or 2020 taxes due between March 11 and July 15, if Gov. John Bel Edwards (D) signs the measure (H.B. 37). The penalty relief would end Nov. 15.

• Proof of a Covid-19 diagnosis would be required if requested by the Department of Revenue.

• The department previously extended the 2020 filing deadline until July 15 for income and franchise tax returns. It also waived penalties for March and April sales tax returns through June 30.

• The Louisiana House unanimously concurred with amendments the Senate approved 36-0 earlier this week.

Use Resources and Toolsfor Tax Professionals

On Our Website ncpeFellowship.com

48

Wayne's World

United States of America, Appellee, v. Louis Kovel, Defendant-appellant, 296 F.2d 918 (2d Cir. 1961)

US Court of Appeals for the Second Circuit - 296 F.2d 918 (2d Cir. 1961) Argued November 2, 1961

Decided December 5, 1961

Louis Bender, New York City (Louis Bender and Jerome Kamerman), New York City, for appellant.

Gerald Walpin, Asst. U. S. Atty., New York City (Robert M. Morgenthau, U. S. Atty. for Southern Dist. of New York, David Klingsberg, Asst. U. S. Atty., New York City, of counsel), for appellee.

New York County Lawyers' Association, New York City (Boris Kostelanetz, Jules Ritholz and Bud G. Holman, New York City, of counsel), submitted a brief as amicus curiae.

Before CLARK, HINCKS and FRIENDLY, Circuit Judges.

FRIENDLY, Circuit Judge.

This appeal from a sentence for criminal contempt for refusing to answer a question asked in the course of an inquiry by a grand jury raises an important issue as to the application of the attorney-client privilege to a non-lawyer employed by a law firm. Our decision of that issue leaves us with the further problem of what disposition is appropriate on a record which, due to the extreme positions erroneously taken by both parties in the court below, lacks the evidence needed to determine whether or not the privilege existed. We vacate the judgment and remand so that the facts may be developed.

Kovel is a former Internal Revenue agent having accounting skills. Since 1943 he has been employed by Kamerman & Kamerman, a law firm specializing in tax law. A grand jury in the Southern District of New York was investigating alleged Federal income tax violations by Hopps, a client of the law firm; Kovel was subpoenaed to appear on September 6, 1961, a few days before the date, September 8, when the Government feared the statute of limitations might run. The

law firm advised the Assistant United States Attorney that since Kovel was an employee under the direct supervision of the partners, Kovel could not disclose any communications by the client or the result of any work done for the client, unless the latter consented; the Assistant answered that the attorney-client privilege did not apply to one who was not an attorney.

The record reveals nothing as to what occurred on September 6. On September 7, the grand jury appeared before Judge Cashin. The Assistant United States Attorney informed the judge that Kovel had refused to answer "several questions * * * on the grounds of attorney-client privilege"; he proffered "respectable authority * * * that an accountant, even if he is retained or employed by a firm of attorneys, cannot take the privilege." The judge answered "You don't have to give me any authority on that." A court reporter testified that Kovel, after an initial claim of privilege had admitted receiving a statement of Hopps' assets and liabilities, but that, when asked "what was the purpose of your receiving that," had declined to answer on the ground of privilege "Because the communication was received with a purpose, as stated by the client"; later questions and answers indicated the communication was a letter addressed to Kovel. After verifying that Kovel was not a lawyer, the judge directed him to answer, saying "You have no privilege as such." The reporter then read another question Kovel had refused to answer, "Did you ever discuss with Mr. Hopps or give Mr. Hopps any information with regard to treatment for capital gains purposes of the Atlantic Beverage Corporation sale by him?" The judge again directed Kovel to answer, reaffirming "There is no privilege — you are entitled to no privilege, as I understand the law." Kovel asked whether he might say something; the judge instructed him to answer, saying "I'm not going to listen." Kovel also declined to tell what Hopps had said concerning a transaction underlying a bad debt deduction in Hopps' 1954 return, and whether Hopps had told him that a certain transfer of securities "had no effect whatsoever" and was just a form of accommodation; the judge gave similar directions after the reporter had read each question and refusal to answer. Then the grand jury, the Assistant and Kovel returned to the grand jury room.

Later on September 7, they and Kovel's employer, Jerome Kamerman, now acting as his counsel, appeared again before Judge Cashin. The Assistant told the judge that Kovel had "refused to answer some of the questions which you had directed him to answer." A reporter re-read so much of the transcript heretofore summarized as contained the first two refusals. The judge offered Kovel another opportunity to answer, reiterating the view, "There is no privilege to this man at all." Counsel referred to New York Civil Practice Act, § 353, which we quote in the margin,1 and sought an adjournment until co-counsel could appear; the judge put the matter over until the next morning.

On the morning of September 8, the same dramatis personae, plus the added counsel, attended in open court. Counsel reiterated that an employee "who sits with the client of the law firm * * * occupies the same status * * * as a clerk or stenographer or any other lawyer * * *"; The judge was equally clear that the privilege was never "extended beyond the

49

Evidence, § 2301; Annot., 53 A.L.R. 369 (1928).2

Indeed, the Government does not here dispute that the privilege covers communications to non-lawyer employees with "a menial or ministerial responsibility that involves relating communications to an attorney." We cannot regard the privilege as confined to "menial or ministerial" employees. Thus, we can see no significant difference between a case where the attorney sends a client speaking a foreign language to an interpreter to make a literal translation of the client's story; a second where the attorney, himself having some little knowledge of the foreign tongue, has a more knowledgeable non-lawyer employee in the room to help out; a third where someone to perform that same function has been brought along by the client; and a fourth where the attorney, ignorant of the foreign language, sends the client to a non-lawyer proficient in it, with instructions to interview the client on the attorney's behalf and then render his own summary of the situation, perhaps drawing on his own knowledge in the process, so that the attorney can give the client proper legal advice. All four cases meet every element of Wigmore's famous formulation, § 2292, "(1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) except the protection be waived," save (7); literally, none of them is within (7) since the disclosure is not sought to be compelled from the client or the lawyer. Yet § 2301 of Wigmore would clearly recognize the privilege in the first case and the Government goes along to that extent; § 2301 would also recognize the privilege in the second case and § 2311 in the third unless the circumstances negated confidentiality. We find no valid policy reason for a different result in the fourth case, and we do not read Wigmore as thinking there is. Laymen consulting lawyers should not be expected to anticipate niceties perceptible only to judges — and not even to all of them.

This analogy of the client speaking a foreign language is by no means irrelevant to the appeal at hand. Accounting concepts are a foreign language to some lawyers in almost all cases, and to almost all lawyers in some cases. Hence the presence of an accountant, whether hired by the lawyer or by the client, while the client is relating a complicated tax story to the lawyer, ought not destroy the privilege, any more than would that of the linguist in the second or third variations of the foreign language theme discussed above; the presence of the accountant is necessary, or at least highly useful, for the effective consultation between the client and the lawyer which the privilege is designed to permit.3 By the same token, if the lawyer has directed the client, either in the specific case or generally, to tell his story in the first instance to an accountant engaged by the lawyer, who is then to interpret it so that the lawyer may better give legal advice, communications by the client reasonably related to that purpose ought fall within the privilege; there can be no more virtue in requiring the lawyer to sit by while the client pursues these possibly tedious preliminary conversations with the accountant than in insisting on the lawyer's physical presence while the client

attorney." In the course of a colloquy the Assistant made it plain that further questions beyond the two immediately at issue might be asked. After the judge had briefly retired, leaving the Assistant and Kovel with the grand jury, proceedings in open court resumed. The reporter recited that in the interval, on reappearing before the grand jury and being asked "What was the purpose communicated to you by Mr. Hopps for your receiving from him an asset and liability statement of his personal financial situation?", Kovel had declined to answer. On again being directed to do so, Kovel declined "on the ground that it is a privileged communication." The court held him in contempt, sentenced him to a year's imprisonment, ordered immediate commitment and denied bail. Later in the day, the grand jury having indicted, Kovel was released until September 12, at which time, without opposition from the Government, I granted bail pending determination of this appeal.

Here the parties continue to take generally the same positions as below — Kovel, that his status as an employee of a law firm automatically made all communications to him from clients privileged; the Government, that under no circumstances could there be privilege with respect to communications to an accountant. The New York County Lawyers' Association as amicus curiae has filed a brief generally supporting appellant's position.

Decision under what circumstances, if any, the attorney-client privilege may include a communication to a nonlawyer by the lawyer's client is the resultant of two conflicting forces. One is the general teaching that "The investigation of truth and the enforcement of testimonial duty demand the restriction, not the expansion, of these privileges," 8 Wigmore, Evidence (McNaughton Rev. 1961), § 2192, p. 73. The other is the more particular lesson "That as, by reason of the complexity and difficulty of our law, litigation can only be properly conducted by professional men, it is absolutely necessary that a man * * * should have recourse to the assistance of professional lawyers, and * * * it is equally necessary * * * that he should be able to place unrestricted and unbounded confidence in the professional agent, and that the communications he so makes to him should be kept secret * * *," Jessel, M. R. in Anderson v. Bank, 2 Ch.D. 644, 649 (1876). Nothing in the policy of the privilege suggests that attorneys, simply by placing accountants, scientists or investigators on their payrolls and maintaining them in their offices, should be able to invest all communications by clients to such persons with a privilege the law has not seen fit to extend when the latter are operating under their own steam. On the other hand, in contrast to the Tudor times when the privilege was first recognized, see 8 Wigmore, Evidence, § 2290, the complexities of modern existence prevent attorneys from effectively handling clients' affairs without the help of others; few lawyers could now practice without the assistance of secretaries, file clerks, telephone operators, messengers, clerks not yet admitted to the bar, and aides of other sorts. "The assistance of these agents being indispensable to his work and the communications of the client being often necessarily committed to them by the attorney or by the client himself, the privilege must include all the persons who act as the attorney's agents." 8 Wigmore,

50

dictates a statement to the lawyer's secretary or is interviewed by a clerk not yet admitted to practice. What is vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer. If what is sought is not legal advice but only accounting service, as in Olender v. United States, 210 F.2d 795, 805-806 (9 Cir. 1954), see Reisman v. Caplin, 61-2 U.S. T.C. ¶ 9673 (1961), or if the advice sought is the accountant's rather than the lawyer's, no privilege exists. We recognize this draws what may seem to some a rather arbitrary line between a case where the client communicates first to his own accountant (no privilege as to such communications, even though he later consults his lawyer on the same matter, Gariepy v. United States, 189 F.2d 459, 463 (6 Cir. 1951)),4 and others, where the client in the first instance consults a lawyer who retains an accountant as a listening post, or consults the lawyer with his own accountant present. But that is the inevitable consequence of having to reconcile the absence of a privilege for accountants and the effective operation of the privilege of client and lawyer under conditions where the lawyer needs outside help. We realize also that the line we have drawn will not be so easy to apply as the simpler positions urged on us by the parties — the district judges will scarcely be able to leave the decision of such cases to computers; but the distinction has to be made if the privilege is neither to be unduly expanded nor to become a trap.5

The application of these principles here is more difficult than it ought be in future cases, because the extreme positions taken both by appellant and by the Government, the latter's being shared by the judge, resulted in a record that does not tell us how Hopps came to be communicating with Kovel rather than with Kamerman. The Government says the burden of establishing the privilege was on Kovel and, since he did not prove all the facts essential to it even on our view, the sentence must stand. Kovel rejoins that the Government always has the burden of showing a criminal defendant's guilt and, since the proof does not negate the possible existence of a privilege, the sentence must fall.

We follow the Government's argument at least to this extent: If we were here dealing with a trial at which a claim of privilege like Kovel's had been overruled and the witness had answered, we should not reverse, since "the burden is on the objector to show that the relation" giving rise to the privilege existed. Woodrum v. Price, 104 W.Va. 382, 389, 140 S.E. 346, 349 (1927). On the other hand, appellant is right that, in a prosecution for criminal contempt, the ultimate burden of persuasion on the issue of privilege remains the Government's, see Michaelson v. United States, 266 U.S. 42, 66, 45 S. Ct. 18, 69 L. Ed. 162 (1924); United States v. Fleischman, 339 U.S. 349, 70 S. Ct. 739, 94 L. Ed. 906 (1950); United States v. Patterson, 219 F.2d 659 (2 Cir. 1955); e. g., if Kamerman had testified he had told Hopps preliminarily to discuss with Kovel the transactions Kovel declined to disclose, and the Government challenged this testimony, it would have had the burden of convincing the judge on the facts. The burden that the Government's proof did shift to Kovel was that of going forward with evidence supporting the claim of privilege, United States v. Fleischman, supra. Kovel did not

discharge that burden, on our view of the law; he claims he was relieved of any need of doing so since the course of the proceedings had made it apparent that no evidence he could have submitted would have influenced the district judge and the law does not require the ritual performance of a useless act, citing United States v. Zwillman, 108 F.2d 802 (2 Cir. 1940). However, the needs of the appellate court also must be considered; in order to preserve Kovel's position on appeal counsel should have proffered the necessary evidence and, if the judge would not receive it, should have made an offer of proof, along the lines prescribed in civil cases by F.R.Civ.Proc. 43(c), 28 U.S.C. Without this we are left in the dark whether a remand will serve any purpose; although the Zwillman opinion dispensed with a formal offer, 108 F.2d p. 804, the record there afforded more assurance that the evidence the judge had refused to consider might sustain the privilege than we have here with respect to evidence not mentioned before the judge, whether or not it exists in other grand jury minutes. However, the uncertainty as to the applicable legal principle, the fixed view of the judge, and the haste with which the proceedings were here conducted because of the prospective running of the statute of limitations, extenuate although they do not altogether excuse the failure of Kovel's counsel to make a proper offer of proof; and a remand for determination of a few simple facts by the judge will not be burdensome. With petitioner's liberty at stake, we believe that the proper course, 28 U.S.C. § 2106.

A final point requires consideration, namely, the Government's contention that the question appellant declined to answer was designed to provide the very factual basis which, on our view, was needed to determine whether the privilege existed. On one reading it was exactly that. If the judge had so explained the question, Kovel would have been bound to answer it to him; a witness claiming the attorney-client privilege may not refuse to disclose to the judge the circumstances into which the judge must inquire in order to rule on the claim, People's Bank of Buffalo v. Brown, 112 F. 652 (3 Cir. 1902); Steiner v. United States, 134 F.2d 931, 935 (5 Cir. 1943); Schwimmer v. United States, 232 F.2d 855, 864 (8 Cir.), cert. denied, 352 U.S. 833, 77 S. Ct. 48, 1 L. Ed. 2d 52 (1956). However, the question was susceptible of other meanings; Kovel could well have understood it as calling for an answer relating to the substance of what Hopps had told him, a substance that might have included admissions whose disclosure would be seriously damaging. On the previous day the direction to answer this question had been linked with two others relating to substance and, just prior to the critical refusal, the Assistant had made it plain that still other questions might come. Although not entirely clear, it seems that the "purpose" of Hopps in sending the figures may have been stated in a letter. If so, Kovel would doubtless have been thinking of whatever the letter said and we do not know what that was; yet the idea of allowing the judge preliminarily to examine the letter was not advanced by anyone. Moreover, the proper practice is for the judge to conduct his preliminary inquiry into the existence of the privilege with the jury excused, see Steiner v. United States, supra, 134 F.2d at 934-935; here the question was asked with the jury present. Kovel's understanding of the question also may be explored on the remand — although, in

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A complex issue that requires proper management of client information.

Wayne

Letters to the Editor

Hello Beanna, I just have to share – Each Friday we have a “Brag” Meeting and share our accomplishments for the week and then we all vote on who gets the “fat lady trophy” This is the little figure you sent a few years back with our membership renewal. So this year we received “superman tax pro” So appropriate and we had to laugh, now we have a NEW Trophy!! Thank You Beanna, you always seem to bring the right tools at the most appropriate time! Even if it is “Superman Tax Pro”. Take CareJanet

Tax History

The IRS Commissioner

IncumbentCharles P. Rettig

since October 1, 2018United States Internal Revenue Service

Style CommissionerReports to Secretary of the Treasury

Seat Internal Revenue Service Building1111 Constitution Ave., NWWashington, D.C.

Appointer The Presidentwith Senate advise and consent

Term length 5 yearsConstituting instrument 26 U.S.C. § 7803

view of what we have been compelled to say on the subject, perhaps without too much practical effect.

The judgment is vacated and the cause remanded for further proceedings consistent with this opinion.

1. "An attorney or counselor at law shall not disclose, or be allowed to disclose, a communication, made by his client to him, or his advice given thereon, in the course of his professional employment, nor shall any clerk, stenographer or other person employed by such attorney or counselor * * * disclose, or be allowed to disclose, any such communication or advice."

2. N.Y.Civil Practice Act, § 353, is a legislative recognition of this principle. We doubt the applicability of the New York statute in a Federal grand jury proceeding; plainly, under F.R.Crim.Proc. 26, 18 U.S.C., it would not be applicable in a Federal criminal trial and we cannot believe the framers of the Criminal Rules intended state law to apply in the former case when it would not in the latter. However, decision of the issue is unnecessary, for there is nothing to indicate the New York legislature intended to do more than enact the principles of the common law

3. To such extent as the language in Himmelfarb v. United States, 175 F.2d 924, 939 (9 Cir. 1949), may be contra, we must respectfully disagree. The amicus curiae brief suggests the actual decision in Himmelfarb may be supported because the record there shows the information had been given by the client for the precise purpose of transmission to a special agent of the Internal Revenue Service and had in fact been so transmitted pursuant to the client's authorization; if that be so, the necessary element of confidentiality was lacking.

4. We do not deal in this opinion with the question under what circumstances, if any, such communications could be deemed privileged on the basis that they were being made to the accountant as the client's agent for the purpose of subsequent communication by the accountant to the lawyer; communications by the client's agent to the attorney are privileged, 8 Wigmore, Evidence, § 2317-1. See Lalance & Grosjean Mfg. Co. v. Haberman Mfg. Co., 87 F. 563 (C.C.S.D.N.Y., 1898)

5. City & County of San Francisco v. Superior Court, etc., 37 Cal. 2d 227, 231 P.2d 26, 25 A.L.R.2d 1418 (1951), and State v. Kociolek, 23 N.J. 400, 129 A.2d 417 (1957), accord generally with the above analysis

Credit to Justia U. S. Law

It is quite clear that the relationship of Kovel was one of employee to the law firm, not a contractor, implying further that the law firm had control over Kovel.

Client confidentiality is reserved for taxpayer representation, not preparation of tax returns.

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Formation 1862First holder George S. Boutwell

Website www.irs.gov

The Commissioner of Internal Revenue is the head of the Internal Revenue Service (IRS), an agency within the United States Department of the Treasury.

The office of Commissioner was created by Congress by the Revenue Act of 1862. Section 7803 of the Internal Revenue Code provides for the appointment of a Commissioner of Internal Revenue to administer and supervise the execution and application of the internal revenue laws. The Commissioner is appointed by the President, with the consent of the Senate, for a five-year term.

The current commissioner is Charles P. Rettig.

Responsibilities

The Commissioner's duties include administering, managing, conducting, directing, and supervising "the execution and application of the internal revenue laws or related statutes and tax conventions to which the United States is a party" and advising the President on the appointment and removal of a Chief Counsel of the IRS. Treasury Order 150-10 states in relevant part: "The Commissioner of Internal Revenue shall be responsible for the administration and enforcement of the Internal Revenue laws. The Commissioner reports to the Secretary of the Treasury through the Deputy Secretary of the Treasury.

One of the Commissioner's most important responsibilities with respect to the internal revenue laws involves prescribing Treasury Regulations administered by the IRS. The U.S. Treasury Regulations provide (in part):

(a) Issuance. --The Commissioner, with the approval of the United States Secretary of the Treasury, or his delegate, shall prescribe all needful rules and all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.

However, the General Counsel of the Department of the Treasury has "the authority to approve all regulations pertaining to the internal revenue laws, including the authority to ratify and approve, where necessary, any such regulations previously issued."

By law, the Commissioner is also part of the "federal law enforcement community."

The following lists Commissioners of Internal Revenue, in chronological order:

1

Name Took Office Left Office

George S. Boutwell Jul 17, 1862 Mar 4, 1863

Joseph J. Lewis (Acting) Mar 5, 1863 Mar 17, 1863

Joseph J. Lewis Mar 18, 1863 Jun 30, 1865

William Orton Jul 1, 1865 Oct 31, 1865

Edward A. Rollins Nov 1, 1865 Mar 10, 1869

Columbus Delano Mar 11, 1869 Oct 31, 1870

John W. Douglass (Acting) Nov 1, 1870 Jan 2, 1871

Alfred Pleasonton Jan 3, 1871 Aug 8, 1871

John W. Douglass Aug 9, 1871 May 14, 1875

Daniel D. Pratt May 15, 1875 Aug 1, 1876

Green B. Raum Aug 2, 1876 Apr 30, 1883

Henry C. Rogers (Acting) May 1, 1883 May 10, 1883

John Jay Knox (Acting) May 11, 1883 May 20, 1883

2

Walter Evans May 21, 1883 Mar 19, 1885

Joseph S. Miller Mar 20, 1885 Mar 20, 1889

John W. Mason Mar 21, 1889 Apr 18, 1893

Joseph S. Miller Apr 19, 1893 Nov 26, 1896

William St. John Forman Nov 27, 1896 Dec 31, 1897

Nathan B. Scott Jan 1, 1898 Feb 28, 1899

George W. Wilson Mar 1, 1899 Nov 27, 1900

Robert Williams Jr. (Acting) Nov 28, 1900 Dec 19, 1900

John W. Yerkes Dec 20, 1900 Apr 30, 1907

Henry C. Rogers (Acting) May 1, 1907 Jun 4, 1907

John G. Capers Jun 5, 1907 Aug 31, 1909

Royal E. Cabell Sep 1, 1909 Apr 27, 1913

William H. Osborn Apr 28, 1913 Sep 25, 1917

Daniel Calhoun Roper Sep 26, 1917 Mar 31, 1920

William M. Williams Apr 1, 1920 Apr 11, 1921

53

2

Walter Evans May 21, 1883 Mar 19, 1885

Joseph S. Miller Mar 20, 1885 Mar 20, 1889

John W. Mason Mar 21, 1889 Apr 18, 1893

Joseph S. Miller Apr 19, 1893 Nov 26, 1896

William St. John Forman Nov 27, 1896 Dec 31, 1897

Nathan B. Scott Jan 1, 1898 Feb 28, 1899

George W. Wilson Mar 1, 1899 Nov 27, 1900

Robert Williams Jr. (Acting) Nov 28, 1900 Dec 19, 1900

John W. Yerkes Dec 20, 1900 Apr 30, 1907

Henry C. Rogers (Acting) May 1, 1907 Jun 4, 1907

John G. Capers Jun 5, 1907 Aug 31, 1909

Royal E. Cabell Sep 1, 1909 Apr 27, 1913

William H. Osborn Apr 28, 1913 Sep 25, 1917

Daniel Calhoun Roper Sep 26, 1917 Mar 31, 1920

William M. Williams Apr 1, 1920 Apr 11, 1921

3

Millard F. West (Acting) Apr 12, 1921 May 26, 1921

David H. Blair May 27, 1921 May 31, 1929

Robert H. Lucas Jun 1, 1929 Aug 15, 1930

H. F. Mires (Acting) Aug 16, 1930 Aug 19, 1930

David Burnet Aug 20, 1930 May 15, 1933

Pressly R. Baldridge (Acting) May 16, 1933 Jun 5, 1933

Guy T. Helvering Jun 6, 1933 Oct 8, 1943

Robert E. Hannegan Oct 9, 1943 Jan 22, 1944

Harold N. Graves (Acting) Jan 23, 1944 Feb 29, 1944

Joseph D. Nunan Jr. Mar 1, 1944 Jun 30, 1947

George J. Schoeneman Jul 1, 1947 Jul 31, 1951

John B. Dunlap Aug 1, 1951 Nov 18, 1952

John Stephens Graham Nov 19, 1952 Jan 19, 1953

Justin F. Winkle (Acting) Jan 20, 1953 Feb 3, 1953

T. Coleman Andrews Feb 4, 1953 Oct 31, 1955

4

O. Gordon Delk (Acting) Nov 1, 1955 Dec 4, 1955

Russell C. Harrington Dec 5, 1955 Sep 30, 1958

O. Gordon Delk (Acting) Oct 1, 1958 Nov 4, 1958

Dana Latham Nov 5, 1958 Jan 20, 1961

Charles I. Fox (Acting) Jan 21, 1961 Feb 6, 1961

Mortimer Caplin Feb 7, 1961 Jul 10, 1964

Bernard M. Harding (Acting) Jul 11, 1964 Jan 24, 1965

Sheldon S. Cohen Jan 25, 1965 Jan 20, 1969

William H. Smith (Acting) Jan 21, 1969 Mar 31, 1969

Randolph W. Thrower Apr 1, 1969 Jun 22, 1971

Harold T. Swartz (Acting) Jun 23, 1971 Aug 5, 1971

Johnnie Mac Walters Aug 6, 1971 Apr 30, 1973

Raymond F. Harless (Acting) May 1, 1973 May 25, 1973

Donald C. Alexander May 25, 1973 Feb 26, 1977

William E. Williams (Acting) Feb 27, 1977 May 4, 1977

5

Jerome Kurtz May 5, 1977 Oct 31, 1980

William E. Williams (Acting) Dec 1, 1980 Mar 13, 1981

Roscoe L. Egger Jr. Mar 14, 1981 Apr 30, 1986

James I. Owens (Acting) May 1, 1986 Aug 3, 1986

Lawrence B. Gibbs Aug 4, 1986 Mar 4, 1989

Michael J. Murphy (Acting) Mar 5, 1989 Jul 4, 1989

Fred T. Goldberg, Jr. Jul 5, 1989 Feb 2, 1992

Shirley D. Peterson Feb 3, 1992 Jan 20, 1993

Michael P. Dolan (Acting) Jan 21, 1993 May 26, 1993

Margaret Milner Richardson May 27, 1993 May 31, 1997

Michael P. Dolan (Acting) Jun 1, 1997 Nov 12, 1997

Charles O. Rossotti Nov 13, 1997 Nov 6, 2002

Bob Wenzel (Acting) Nov 7, 2002 Apr 30, 2003

Mark W. Everson May 1, 2003 May 4, 2007

Kevin M. Brown (Acting) May 5, 2007 Sep 9, 2007

54

Tax Quotes

“Few of us ever test our powers of deduction, except when filling out an income tax form.”— Laurence J. Peter, author

“I’ve filed a tax return every year since I was 13. The last decade has been about the lowest tax rate. It was tougher when I was selling shirts at Penny’s.” – Warren Buffett

"The best measure of a man's honesty isn't his income tax return. It's the zero adjust on his bathroom scale.'' — Arthur C. Clarke, author

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5

Jerome Kurtz May 5, 1977 Oct 31, 1980

William E. Williams (Acting) Dec 1, 1980 Mar 13, 1981

Roscoe L. Egger Jr. Mar 14, 1981 Apr 30, 1986

James I. Owens (Acting) May 1, 1986 Aug 3, 1986

Lawrence B. Gibbs Aug 4, 1986 Mar 4, 1989

Michael J. Murphy (Acting) Mar 5, 1989 Jul 4, 1989

Fred T. Goldberg, Jr. Jul 5, 1989 Feb 2, 1992

Shirley D. Peterson Feb 3, 1992 Jan 20, 1993

Michael P. Dolan (Acting) Jan 21, 1993 May 26, 1993

Margaret Milner Richardson May 27, 1993 May 31, 1997

Michael P. Dolan (Acting) Jun 1, 1997 Nov 12, 1997

Charles O. Rossotti Nov 13, 1997 Nov 6, 2002

Bob Wenzel (Acting) Nov 7, 2002 Apr 30, 2003

Mark W. Everson May 1, 2003 May 4, 2007

Kevin M. Brown (Acting) May 5, 2007 Sep 9, 2007

Renew Your Membership OnlineIf Your Membership is due

in June or July

Next Edition of Taxing Times:August 1st, 2020

1

Linda E. Stiff[11][12](Acting) Sep 10, 2007 Mar 24, 2008

Douglas H. Shulman Mar 24, 2008 Nov 9, 2012

Steven T. Miller (Acting) Nov 10, 2012 May 22, 2013

Daniel Werfel (Acting) May 22, 2013[13] December 23, 2013

John Koskinen December 23, 2013 November 9, 2017

David Kautter (Acting) November 13, 2017 October 1, 2018

Charles P. Rettig October 1, 2018