Since many advisers seem to have difficulty understanding the rules under which certain individuals are barred from having wages qualify for the employee retention credit outlined in IRS Notice 2021-49, I’ve summarized key portions of those rules in the following two sections. See our main article[1] for the authorities behind each step-by-step process detailed below.

The IRS has published 34 pages of additional guidance[1] on the Employee Retention Credit (ERC), including the first guidance on the changes made for the 3rd and 4th quarter credits and the official IRS word on the related party issues raised by the references to IRC §§51(i)(1) and 267(c) we wrote about in April of 2021.[2]

In the case of the issues for §§51(i)(1) and 267(c), the IRS arrived at an identical conclusion to that expressed in our April article—wages paid to those with a controlling interest in the employer will not be eligible for the credit unless the controlling interest holder has no living relatives (or just very remote ones).

There are two major sections to the Notice, the first providing guidance on the changes made to the ERC for the 3rd and 4th quarter of 2021 and the second providing guidance on additional issues applicable to all versions of the ERC.

The Eleventh Circuit Court of Appeals upheld the Tax Court’s decision regarding self-employment income in the case of Slaughter v. Commissioner.[1] In this case, an author argued that most of the income she received from her publishing contract was for activities other than the time she spent writing books. She argued that payments for anything other than time spent writing a book was not income from a trade or business for self-employment tax purposes.

In CCA 202130014[1] the IRS Chief Counsel’s office discussed the issues related to conservation easement extinguishment, stating that the requirements prevent an easement with an extinguishment clause that removes post-donation increases in property values due to post-donation improvements from the calculation of the charity’s share of such proceeds from qualifying for a charitable deduction under IRC §170(h).

The CCA states the issue to be addressed as follows:

Does a conservation easement fail to satisfy the requirements of section 170(h) of the Code if the deed contains language subtracting from the donee’s extinguishment proceeds the value of post-donation improvements or the post-donation increase in value of the property attributable to improvements?[2]

The IRS updated its FAQ on “Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021,” adding Question 27a that creates a “substantially similar condition” under the Families First Coronavirus Relief Act (FFCRA) Section 5102(a)(6) that allows a credit for leave time paid to employees who take leave to:

• Accompany an individual with a qualifying relationship to the employee or self-employed person who is obtaining a vaccination or

• Care for an individual with a qualifying relationship to the employee or self-employed person who is recovering from a vaccination.[1]

The Small Business Administration (SBA) has issued a new Interim Final Rule (IFR) that provides an option for lenders to allow certain borrowers to apply for forgiveness directly through the SBA, creates an optional simplified method to document the required drop in revenue for Second Draw Paycheck Protection Program (PPP) loans for certain borrowers and provides a deferment of payments for those who timely file an appeal with the SBA.[1]

In November of 2019, we wrote[1] about the case of Wilson, et. al. v. United States, Case No. 2:19-cv-05037, US District Court, Eastern District of New York where a taxpayer prevailed in a case where he was the sole owner and beneficiary of a foreign trust. The owner/beneficiary was found to be liable for only the smaller 5% penalty under §6677(b) as the owner of a foreign trust that fails to file a report under IRC §6048. He was able to escape the 35% penalty imposed on a beneficiary for failing to report the receipt of a distribution from that trust as required by the same section.

However, the Second Circuit Court of Appeals has now reversed the District Court after the IRS appealed the decision,[2] finding that the 35% penalty the IRS had originally imposed was due in this case, noting:

We vacate the court’s judgment and hold that when an individual is both the sole owner and beneficiary of a foreign trust and fails to timely report distributions she received from the trust, the government has the authority under the IRC to impose a 35% penalty.[3]

IRS emailed advice is always tricky to interpret, since we are seeing only one side of a conversation in these cases—only the IRS attorney’s response is provided. And, unlike more formal advice from the Chief Counsel’s office, these emails do not follow a formal structure where the facts under consideration are outlined in the attorney’s response.

But Chief Counsel Email 202129012[1] contains one side of a discussion that outlines an issue that arises with partnership examinations under the BBA centralized partnership audit regime, discussing if it matters that the partnership can show that if an item of adjustment had been properly reported by the partners no additional income tax would have resulted. The partnership would want to have this amount excluded from the imputed adjustment (IU) under the regime, which is generally subjected to tax at the highest marginal tax rate when paid by the partnership.

When dealing with a decedent’s estate, an executor of the estate may face personal liability for taxes found to be due from the estate if the executor made a distribution that rendered the estate insolvent, assuming the executor had knowledge or notice of that liability or potential liability.[1]

In the case of Fagenboym v. Commissioner [1] we see a taxpayer unsuccessfully attempt to make use of the most-cited case in federal income tax cases—the case of Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).

For those who aren’t familiar with the Cohan case, the case involved vaudeville producer and entertainer George M. Cohan and produced what is often referred to as the Cohan doctrine or rule. The opinion summarizes this rule as follows:

Under the Cohan rule, when a taxpayer establishes that he or she has incurred a deductible expense, but is unable to substantiate the exact amount, the Court is permitted to estimate the deductible amount. Id. at 543-544. But we can do so only to estimate the amount of the deductible expense when the taxpayer provides evidence sufficient to establish a rational basis upon which the estimate can be made. See Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). In estimating the amount allowable the Court bears heavily upon the taxpayer who failed to maintain required records and to substantiate expenses as the Code requires. See Cohan v. Commissioner, 39 F.2d at 544; Keenan v. Commissioner, T.C. Memo. 2006-45, aff’d, 233 F. App’x 719 (9th Cir. 2007).[2]

The IRS published a notice in the Federal Register on July 19, 2021 asking for comments on a new Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations and related instructions.[1]

The notice describes the proposed form in an abstract section as follows:

Internal Revenue Code (IRC) Section 1366 determines the shareholder’s tax liability from an S corporation. IRC Section 1367 details the adjustments to basis including the increase and decrease in basis, income items included in basis, the basis of indebtedness, and the basis of inherited stock. Shareholders will use Form 7203 to calculate their stock and debt basis, ensuring the losses and deductions are accurately claimed.[2]

The form and instructions have not been made available for download at this time. Rather, interested parties are directed to request the form and instructions from an IRS contact listed in the notice.

The IRS has opened up a website by which Circular 230 practitioners (CPAs, EAs and attorneys) can submit a Power of Attorney request.[1] The page contains information on using the service as well as the link to access the system. The IRS has also published an addition to the Internal Revenue Manual at 21.2.1.63[2] that describes the program and noted it would become available on July 18, 2021. The program is described as follows:

Tax Pro Account is an online system, available to the public on July 18, 2021, that allows individual tax professionals to securely request third party authorizations for an individual taxpayer as power of attorney (POA) or tax information authorization (TIA), in lieu of filing a paper Form 2848, Power of Attorney and Declaration of Representative, or Form 8821, Tax Information Authorization.[3]

However, the IRM notes that “[t]he Tax Pro Account application does not have the [specific capabilities] that the forms allow, as detailed below.”[4] That is, only a very limited set of authorizations can be handled via this system. In fact, advisers will note that the system, at least at the beginning, is very limited in the situations in which it can be used, and it will require the adviser’s client to access the system as well as this system has both the professional and the client electronically sign the form.

In the case of Morreale v. Commissioner[1] the Tax Court found that the IRS position in his case was not substantially justified, awarding the taxpayer attorney’s fees for the costs incurred on this matter—but this matter alone, and only at the statutory rate.

The taxpayer is a hotelier and restaurateur who operated in Denver. He failed to file income tax returns for 2011 and 2012 and in 2013 filed for bankruptcy. The IRS bankruptcy specialists referred the case to the Examination Division to assist in the preparation of substitutes for returns for 2011 and 2012.[2]

The taxpayer agreed to prepare the delinquent income tax returns. After the returns were submitted to the Revenue Agent, the RA proposed adjustments based on two primary issues:

• The taxpayer had not substantiated basis in Sketch, LLC which operated two restaurants[3] and

• The taxpayer had improperly reported income on the accrual basis of accounting, so that accrued but unpaid expenses were disallowed.[4]

During the COVID-19 pandemic, many people turned to digital signatures to avoid meeting face to face. And, as we’ve noted in prior posts, the IRS also authorized the use of electronic signatures for many purposes.[1] If you search Google for “digital signatures legally binding” you are likely to get links to articles from many digital signature providers with headlines stating that such signatures are legally binding.

But if you read behind the headlines you will find caveats and exceptions. In the case of Mills v. United States,[2] the taxpayer discovered that signatures on tax documents are subject to specific requirements and his use of a digital signature did not count, costing him the chance to pursue his claim for refund

The Fifth Circuit Court of Appeals upheld a lower court ruling that a taxpayer did not have reasonable cause for late filing of his tax returns when the attorney he had hired to handle such affairs while the taxpayer was incarcerated had embezzled the funds meant to be used to pay the taxes and had not filed the returns in question.[1] The case illustrates just how difficult it is for a taxpayer to escape such penalties by claiming reliance on a tax professional, even when that professional has intentionally misled the taxpayer about having filed the returns in question.

The Journal of Accountancy reported that the SBA informed lenders in a July 9 letter that it will no longer request the completion of a loan necessity questionnaire for borrowers with PPP loans of more than $2 million and will not perform an additional necessity review.[1]

The justification for the way that IRA custodians are asked to report qualified charitable distributions (QCDs) under IRC §408(d) is explained by the IRS in Information Letter 2021-0007[1] addressed to Rep. Chip Roy of Texas.

The letter begins by explaining generally how the QCD rules work:

Under Section 408(d)(8) of the Internal Revenue Code (Code), a taxpayer can exclude from gross income up to $100,000 of QCDs each year. Section 408(d)(8)(B) of the Code defines a QCD as a distribution from an IRA, whose owner is at least age 70½, made directly to one or more specified charitable organizations, provided the distribution would be includible in the IRA owner's gross income if it were made to the owner instead. Any deductions a taxpayer took for IRA contributions made during years they were 70½ or older, also reduce the amount available for QCDs.[2]

In Information Letter 2021-0012[1] the IRS, while declining to provide the specific ruling the taxpayer requested, does provide specific examples of legal expenses that would not be deductible for income tax purposes.

In an information letter issued in December of 2020 to the office of then-Senator Kelly Loeffler,[1] the IRS explained why the Senator’s constituent was required to provide additional documentation to support that amounts paid with a debit card linked to her employer-sponsored health flexible spending account and that the employer had properly deactivated her card.