In PLR 202048009[1] a taxpayer asks the IRS to allow him to make a late election under §475(f)(1), a request the agency turned down.

Mark to Market Election

The mark to market election allows a trader to get around the $3,000 annual limit on net capital losses, treating the transactions as leading to ordinary income and loss. However, the taxpayer must agree to “mark to market” any securities held at year end, reporting a gain/loss based on their value at the end of the year, resetting their basis to that level at the beginning of the following year.

The IRS has released final regulations dealing with the revisions made to the unrelated business income tax (UBIT) by the Tax Cuts and Jobs Act (TCJA) in 2017.[1] TCJA added IRC §512(a)(6) which provides:

(6) Special rule for organization with more than 1 unrelated trade or business

In the case of any organization with more than 1 unrelated trade or business—

(A) unrelated business taxable income, including for purposes of determining any net operating loss deduction, shall be computed separately with respect to each such trade or business and without regard to subsection (b)(12),

(B) the unrelated business taxable income of such organization shall be the sum of the unrelated business taxable income so computed with respect to each such trade or business, less a specific deduction under subsection (b)(12), and

(C) for purposes of subparagraph (B), unrelated business taxable income with respect to any such trade or business shall not be less than zero.

The IRS had initially released Notice 2018-67 dealing with these issues in August of 2018, followed up by proposed regulations (REG-106864-18) that were issued in April 2020. These regulations are now being finalized with some modifications.

The key provisions are found in new Reg. §1.512(a)-6, with some modifications made to Reg. §§1.170A-9, 1.509(a)-3, 1.512(a)-1, 1.512(b)-1 and 1.513-1.

The Tax Cuts and Jobs Act limited like-kind exchanges under §1031 to exchanges of real property effective January 1, 2018. The IRS issued proposed regulations in June 2020 [1] to implement these revisions in §1031. In November 2020 the IRS finalized these regulations after making certain changes.[2]

In an earlier article we had discussed reports that the IRS was planning to issue guidance to block borrowers from claiming a deduction for expenses they expected to use for Paycheck Protection Program (PPP) loan forgiveness even if they had not yet applied for or received forgiveness.[1] Now that shoe has dropped with the issuance of Revenue Ruling 2020-27.[2]

The taxpayer in the case of Padda v. Commissioner, TC Memo 2020-154,[1] was able to show material participation in various restaurants by use of the significant participation activity test found in Reg. §1.469-5T(a)(4).

We did cover this case in another article for the separate issue of the taxpayer’s unsuccessful attempt to avoid a late filing penalty for the year under exam. But the taxpayer’s arguments for claiming material participation in the restaurant activities were found far more persuasive by the court, with the taxpayer prevailing on the issue.

IRS Commissioner Charles Rettig told an AICPA online conference on November 17 that blanket penalty relief from late-filing and late payment penalties is “not going to happen” per a report of the session published in Tax Notes Today Federal.[1]

The IRS has updated their FAQ on the Employee Retention Credit (ERC) added by the CARES Act in March to give guidance when an employer acquires stock or assets of another employer that received a Paycheck Protection Program (PPP) loan.[1]

Under the ERC, no credit may be claimed by an employer who received a PPP program loan, regardless of whether or not the employer sought forgiveness of some or all of the loan. This raises a question about what happens if an employer who did not obtain a PPP loan later acquires an employer who did obtain such a loan. Does that employer and related entities now lose access to the ERC due to having acquired a “tainted” entity?

The IRS has issued draft instructions[1] to go with the Draft Schedule K-1[2] issued in July and Draft Form 1120-S[3] issued in August. The draft instructions contain information on the new items G (related to stock ownership) and H (related to loans from shareholders) added to this year’s K-1, as well as a discussion of expenses paid with forgiven Paycheck Protection Program (PPP) loan proceeds.

The Tax Court found that a taxpayer did not reasonably rely on a CPA retained to timely file his tax return in the case of Padda v. Commissioner, TC Memo 2020-154.[1] This was true even though the CPA submitted the return seconds after the clock ticked past midnight on October 15, 2013.

A taxpayer attempted to argue that an LLC into which he had Chase distribute funds from his SEP-IRA was part of a “conduit agency arrangement” via which he had the funds invested in loans on behalf of the IRA in the case of Ball v. Commissioner, T.C. Memo 2020-152.[1] Unfortunately, the Tax Court found that he had full control of the funds at all times, making the entire $209,600 a taxable premature distribution to Mr. Ball.

An issue that has not yet been addressed directly by the IRS is the treatment of certain expenses paid after a taxpayer received a Paycheck Protection Program (PPP) loan when the taxpayer’s tax year end concludes prior to either the filing of an application for or a grant of forgiveness.

The PPP loan program, established by the CARES Act signed into law in March of 2020[1], provided loans to eligible small businesses. If the borrower used the loan proceeds to pay certain eligible expenses, an amount of the loan up to such eligible expenses would be forgiven under the law[2] and such forgiveness would not be treated as taxable income to the borrower.[3]

In a news release (IR-2020-248)[1] the IRS announced relief for taxpayers in various collection activities to help taxpayers struggling due to COVID-19.

The IRS has released guidance for preparing Forms W-2 for employers who have deferred employee old age, survivors and disability taxes pursuant to the President’s August 8 memorandum, as provided for in Notice 2020-65.[1]

A number of sources are reporting that the SBA has begun circulating two forms to be completed by borrowers with PPP loans in excess of $2 million, to provide information for determining the necessity of their borrowings.[1] The SBA had published a notice in the Federal Register on October 26, 2020 indicating that there would be two such forms (Forms 3509, Loan Necessity Questionnaire (For-Profit Borrowers) and 3510 Loan Necessity Questionnaire (Non-Profit Borrowers))[2] the agency had not posted such forms on any website as of October 30.

However, copies of such forms did show up on various websites, all of which reported that the SBA had not return requests for comments on whether the forms published were authentic. One such copy of the Form 3509 can be found on Politico’s website,[3] and other sites have identical copies of the form.

In an information letter,[1] the IRS has informally addressed an issue that has existed since the passage of the Tax Cuts and Jobs Act—does the $10,000 state and local tax deduction cap apply to the special deduction under IRC §216 to a shareholder’s portion of taxes paid by a housing cooperative?

In February 2019[2] we published an article looking at the interaction of the limitation on personal state and local taxes found at IRC §164(b)(6) and the deduction allowed for owners of shares in a real estate cooperative under IRC §216. A real estate cooperative is an alternative to the use of a condominium structure to have an individual purchase a segment (or unit) in a particular building. The cooperative is a corporation that owns the building, with each shareholder normally having the right to occupy a particular unit.

The IRS has released a draft of the Form 1065 instructions for 2020 returns that contains the IRS’s proposed requirement for reporting partners’ capital on the K-1 on the tax basis.[1] The IRS issued a news release on the matter at the same time.[2]

News Release Summary

The news release indicates that the IRS has decided to require partnerships to use the transactional approach in computing partners’ capital on the tax basis, and require tax basis capital reporting on the 2020 Schedules K-1, Form 1065. The release states:

The revised instructions indicate that partnerships filing Form 1065 for tax year 2020 are to calculate partner capital accounts using the transactional approach for the tax basis method. Under the tax basis method outlined in the instructions, partnerships report partner contributions, the partner’s share of partnership net income or loss, withdrawals and distributions, and other increases or decreases using tax basis principles as opposed to reporting using other methods such as GAAP.

In the case of Giambrone et al v. Commissioner, TC Memo 2020-145[1] the Tax Court ruled that a taxpayer must strictly follow an IRS revenue procedure granting a more favorable tax treatment than normally would be available if the taxpayer wishes to take advantage of the procedure.

The case involved what is often referred to as the “Madoff ruling” found at Revenue Procedure 2009-20. The revenue procedure grants taxpayers relief from the normal provisions for claiming a theft loss from criminally fraudulent investment arrangements, such as Ponzi schemes. The ruling was issued following the confession of Bernie Madoff to having run one of the largest Ponzi schemes ever.