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Weekly IRS Roundup May 11 – May 15, 2020

by | May 18, 2020 | ,

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of May 11 – May 15, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

May 12, 2020: The IRS issued proposed regulations concerning the application of IRC § 162(f), as amended by the Tax Cuts and Jobs Act. The proposed regulations provide that taxpayers may not deduct amounts that, pursuant to court orders or settlement agreements, are paid to, or at the direction of, governments in relation to the violation of any law or the investigation or inquiry into the potential violation of any law.

May 13, 2020: The IRS and the Department of Treasury provided a notice of public hearing for the source of income from certain sales of property under IRC § 863 on June 3, 2020.

May 15, 2020: The IRS expanded partner for Economic Impact Payments to provide information in multiple languages to aid with outreach.

May 15, 2020: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Emily Mussio in our Chicago office for this week’s roundup.



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Weekly IRS Roundup May 4 – May 8, 2020

by | May 11, 2020 | ,

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of May 4 – May 8, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

May 7, 2020: The IRS issued proposed regulations that provide guidance for estates and trusts clarifying that certain deductions of estates and non-grantor trusts are not miscellaneous itemized deductions. The proposed regulations also provide guidance on determining the character, amount and allocation of deductions in excess of gross income succeeded to by a beneficiary on the termination of an estate or non-grantor trust.

May 8, 2020: The Large Business & International (LB&I) Division of the IRS released an update to the Practice Unit titled Official Versus Free Market Exchange Rate. The update covers determining the appropriate exchange rate used to translate foreign currency amounts. The unit supersedes the previously published Practice Unit with the same title published on December 20, 2016. It was updated to include Argentina as a hyperinflationary economy.

May 8, 2020: The LB&I Division released a Practice Unit on the Overview of IRC 986(c) Gain or Loss Prior to Tax Cuts and Jobs Act of 2017 to address foreign currency gain or loss on the distribution of previously taxed income by a controlled foreign corporation to a US shareholder.

May 8, 2020: The LB&I Division released a Practice Unit on IRC 481(a) Adjustments for IRC 263A Accounting Method Changes. The updated Practice Unit focuses on a change to the treatment of IRC § 263A costs that require the IRS to compute an IRC § 481(a) adjustment and notify the taxpayer that it is treating the accounting method issue as a change in accounting method and also provides examples of such change.

May 8, 2020: The LB&I Division released a Practice Unit on the Foreign Earned Income Exclusion Adjustment. The materials outline the steps on calculating the exclusion adjustment, which include: (1) determining the amount of foreign income excluded; (2) determining the amount of foreign taxes allocable to excluded foreign income; and (3) computing the foreign earned income exclusion adjustment.

May 8, 2020: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, Technical Advice Memorandums and Chief Counsel Advice).

Special thanks to Emily Mussio in our Chicago office for this week’s roundup.



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IRC 45Q Credit Under IRS Scrutiny: Government Finds Majority of Carbon Oxide Credits Improperly Claimed

by and | May 6, 2020 | ,

In response to a series of questions posed in a November 2019 letter from Senator Menendez (D-NJ), the Treasury Inspector General for Tax Administration (TIGTA) issued a letter on April 15, 2020, analyzing carbon oxide credits under Internal Revenue Code (IRC) section 45Q. For tax years between 2010 and 2019, TIGTA found that up to 87% of the value of the credits claimed were not in compliance with Environmental Protection Agency (EPA) monitoring, reporting, and verification requirements.

IRC section 45Q provides a credit to taxpayers that capture and sequester carbon oxide. The credit was initially enacted into law in 2008, then substantially revised in 2018. As part of the revisions, the credit was expanded from solely carbon dioxide capture to include a broader set of carbon oxide emissions. This substantially expanded the class of taxpayers eligible to claim the credit. Although Treasury released some guidance in February 2020, there are still many unresolved questions about the expanded carbon oxide credit, and many taxpayers are waiting to move forward with additional projects pending release of that guidance.

The TIGTA analysis covers tax years 2010–2019, so it will primarily include carbon dioxide projects. The letter reports that only 10 out of the 672 taxpayers who claimed the IRC section 45Q credit received over $1 million in credits, and these 10 taxpayers represent 99.86% of the total value of all IRC section 45Q credits, around $1.02 billion. An examination of return data found that 87% of the credits claimed by these 10 taxpayers may have been improper because there was not an approved EPA monitoring, reporting, and verification plan in place when the credits were claimed. TIGTA reported that the IRS had already taken action against 4 of these 10 taxpayers—disallowing approximately 60% of the improperly claimed credits. Additional enforcement activity may target taxpayers who claimed large amounts of carbon sequestration credits.

Practice Point: Taxpayers considering investing in carbon oxide sequestration projects should perform extensive diligence on the project and make sure that they technically meet the requirements. We expect that carbon sequestration projects may come under increased scrutiny and result in more audits going forward. Spending the time and resources to ensure that your project conforms to the rules will save you money if the IRS denies your credits. Additionally, make sure to contemporaneously document your efforts to follow the rules; this may assist in penalty abatement if asserted.



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IRS Appeals Large Case Pilot Program Ends

by and | May 6, 2020 | , ,

More than three years ago, the Internal Revenue Service (IRS) revised the Internal Revenue Manual to provide IRS Appeals Division (Appeals) with discretion to invite representatives from the IRS Examination Division (Exam) and IRS Office of Chief Counsel (Counsel) to the Appeals conference. The IRS also started a three-year initiative for taxpayers under the Large Business & International (LB&I) Division with cases assigned to Appeals Team Case Leaders (ATCLs). Under the initiative, LB&I personnel from Exam and Counsel were invited to the non-settlement portion of the taxpayer’s Appeals conference to test whether the participation of both parties would assist Appeals in narrowing and resolving complex factual and legal differences.

The IRS announced that the initiative ended on May 1, 2020. The IRS has invited comments from the public about the initiative and its effectiveness. Such comments should be submitted by August 31, 2020.

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Weekly IRS Roundup April 27 – May 1, 2020

by | May 5, 2020 | , ,

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of April 27 – May 1, 2020. Additionally, for continuing updates on the tax impact of COVID-19, please visit our resource page here.

April 28, 2020: The IRS published Large Business and International (LB&I) Process Unit on the substantiation of foreign tax credits for individuals. For an individual to claim a foreign tax credit, individual taxpayers must submit Form 1116 with their US federal income tax return. At the request of the IRS, the taxpayer must provide evidence supporting the foreign taxes claimed on Form 1116.

April 28, 2020: The IRS published LB&I Concept Unit on the installment method under IRC § 453. An installment sale occurs when a seller receives at least one payment in a tax year after the disposition. An installment sale is reported on a Form 6252.

April 30, 2020: The IRS issued Revenue Procedure 2020-29, temporarily allowing for the electronic submission of letter ruling requests, closing agreements, determination letters, information letters from the IRS Office of Chief Counsel, and for determination letters issued by the IRS LB&I Division.

April 30, 2020: The IRS published Notice 2020-32, which provides guidance regarding the deductibility of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a loan (covered loan) pursuant to the Paycheck Protection Program under § 7(a)(36) of the Small Business Act. Notice 2020-32 provides that no deduction is allowed for US federal income tax purposes if the payment of the expense results in forgiveness of a covered loan pursuant to § 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

May 1, 2020: The IRS released Notice 2020-36, which contains a proposed revenue procedure to update the procedures under which recognition of exemption from federal income tax for organizations described in IRC § 501(c) may be obtained on a group basis for subordinate organizations affiliated with and under the general supervision or control of a central organization. The proposed revenue procedure would modify and supersede Revenue Procedure 80-27, 1980-1 C.B. 677 (as modified by Rev. Proc. 96-40, 1996-2 C.B. 301).

May 1, 2020: The Department of Treasury and IRS released a notification that a public hearing is being held on Wednesday May 20, 2020 via teleconference. The public hearing will be on the proposed regulations that provide guidance relating to the allocation and apportionment of deductions and creditable foreign taxes, the definition of financial services income, foreign tax redeterminations, availability of foreign tax credits under the transition tax, and the application of the foreign tax credit limitation to consolidated groups. The IRS must receive speakers’ outlines of the topics to be discussed at the public hearing by Monday, May 11, 2020. If no outlines are received by May 11, 2020, the public hearing will be cancelled.

May 1, 2020: The IRS released its weekly list of written determinations (e.g., Private Letter Rulings, [...]

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Eighth Circuit Applies Subjective Standard to Reasonable Basis Penalty Defense

by and | May 4, 2020 | , ,

On April 24, 2020, the US Court of Appeals for the Eighth Circuit published its opinion in Wells Fargo & Co. v. United States, No. 17-3578, affirming a district court’s holdings that the taxpayer was not entitled to certain foreign tax credits and was liable for the negligence penalty for claiming the credits. Much has been written about the substantive issue, which we will not discuss here. Instead, we focus on the Eighth Circuit’s divided analysis relating to the reasonable basis defense to the negligence penalty.

In Wells Fargo, the taxpayer relied solely on the reasonable basis defense to the government’s assertion of penalties. Under Internal Revenue Code (IRC) section 6662(b)(1), a taxpayer is liable for penalty of 20% of an underpayment of its taxes attributable to its “negligence.” Various defenses are potentially applicable to the negligence penalty, which we recently discussed in detail here. One such defense is if the taxpayer can show it had a “reasonable basis” for its position. Under Treas. Reg. § 1.6662-3(b), this defense applies if the taxpayer’s return position was “reasonably based on” certain authorities specified in the regulations.

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You Can Now Submit Your Letter Rulings and Determinations to the IRS Electronically

by and | May 1, 2020 | ,

Rev. Proc. 2020-29 temporarily allows taxpayers to submit certain requests for letter rulings and determinations to the Internal Revenue Service (IRS) electronically. Electronic submissions will be permitted until the revenue procedure is superseded or modified, but taxpayers may still make paper submissions.

Electronic submissions are permitted for requests for letter rulings, closing agreements, determination letters, and information letters from the Associate Chief Counsel Offices and for determination letters from the Large Business and International (LB&I) Division. However, procedures for submissions to the IRS Small Business/Self Employed Division, Wage and Investment Division, or Tax Exempt and Government Entities Division are unchanged.

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Thank You to Our Readers

by | Apr 30, 2020 |

We greatly appreciate our readers over the past year and are pleased to share that we were recently recognized as the #1 Firm for tax thought leadership in the 2020 JD Supra Readers’ Choice Awards, which acknowledge top authors and firms for their thought leadership in key topics during all of last year. In addition, partner and blog editor Kevin Spencer was recognized as a “Top Author” for tax.

Through our various blogs, thought leadership pieces and tax-focused events, we are dedicated to maintaining our position as a leading firm for tax work and keeping clients abreast of significant and relevant topics in the industry.



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Despite NOL Carrybacks, IRS Continues to Deny Refunds of Section 965 Transition Tax Overpayments

by | Apr 29, 2020 | ,

In a series of frequently asked questions (FAQs) addressing the interaction of recently enacted net operating loss (NOL) carryback provisions and section 965, the IRS stated that taxpayers may not receive a refund of any section 965 tax payment unless and until the payment exceeds the “entire income tax liability for section 965.” The IRS further stated that such amount “includes all amounts to be paid in installments under section 965(h) in subsequent years.” This position – that taxpayers are not entitled to a refund of an overpayment of the section 965 tax liability unless and until the overpayment amount exceeds the full eight years of installment payments – is consistent with the IRS’s previously published position in PMTA 2018-016 (and as discussed in our prior analyses, here and here).

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Fifth Circuit Rules that Law Firm Clients’ Identities Are Not Privileged

by and | Apr 28, 2020 | , , ,

In Taylor Lohmeyer Law Firm P.L.L.C. v. United States, No. 19-50506, the United States Court of Appeals for the Fifth Circuit held that a Texas-based estate and tax-planning law firm (Firm) could not invoke the attorney-client privilege against an Internal Revenue Service (IRS) summons seeking the identity of its clients.

According to an IRS revenue agent’s declaration submitted in support of the summons, the Firm became a target for IRS investigation following an audit of one of its clients, an individual who had used the Firm’s services to establish and operate various foreign accounts and entities, through which the individual had funneled millions of dollars of unreported income. The IRS issued a John Doe summons to the Firm seeking, amongst other things, the identities of other clients for whom it had established foreign accounts or entities.

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