In the case of Sherwin Community Painters, Inc. v. Commissioner, TC Memo 2022-19 a corporation was denied a deduction for amounts paid for the boyfriend of the owners’ daughter to take a course in coding.

The company in question was a commercial painting contractor whose stock was owned by Mr. and Mrs. Ward. The amounts in question were paid for a coding course at Northwestern University.

The Wards met Mr. Kocemba in 2016 when he was dating their daughter. Mr. Kocemba expressed an interest in the course, and the Wards offered to pay the tuition if he was admitted.[1]

Although Mr. Kocemba had no coding experience before taking this course, he had worked in the construction industry. The corporation attempted to claim paying his tuition was a deductible business expense as Mr. Kocemba updated the organization’s website once he completed the course:

After completing the course in 2017, Mr. Kocemba used the skills that he had learned to update Sherwin's website over the course of several months and spent a considerable amount of time working on the website. Sherwin did not pay him for his work. Mr. Kocemba later married the Wards' daughter. He has performed additional computer-related work for Sherwin without compensation.[2]

The US Department of Labor issued a Compliance Assistance Release that contains warnings to 401(k) plans that are offering or are considering offering investments in cryptocurrencies as part of the investment options for 401(k) plan participants.[1]

The Department notes in a footnote that their concerns involve all types of digital assets, not just cryptocurrencies, despite the release only referencing cryptocurrencies:

Although this release specifically references “cryptocurrencies,” the same reasoning and principles also apply to a wide range of “digital assets” including those marketed as “tokens,” “coins,” “crypto assets,” and any derivatives thereof.[2]

The release begins by cautioning plan fiduciaries about needing to exercise extreme care before offering such an option:

In recent months, the Department of Labor has become aware of firms marketing investments in cryptocurrencies to 401(k) plans as potential investment options for plan participants. The Department cautions plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.[3]

As many of us are very aware, many tax software providers have had real problems getting their systems up and running to handle filings of 2021 returns on both the federal and state level. The IRS added a number of new forms this year related to passhthrough entities (including the Schedules K-2 and K-3 that have consumed so much professional time these past couple of months due to IRS clarification of the instructions) and a large number of states have instituted brand new passthrough entity taxes that mainly took effect this year, with the required forms and instructions being issued late by many state taxing agencies.

All of this created a lot of new coding to be done to provide support for these forms and returns, more than the vendors would normally face. With much of the guidance coming late in 2021 or into the first couple of months of 2022, there also was not a lot of time to get all of this new code written and tested. The vendors have ended up having to delay when they would be able to transmit impacted returns.

Image credit: https://launchpresso.com/

A number of those with an interest in the taxation of virtual currencies, in particular those looking at the taxation of staking, had voiced excitement back in February over an announcement that the IRS had made a settlement offer in a case brought by Joshua Jarrett.[1]

In proposed regulations[1] the IRS would increase the initial and renewal user fee for enrolled agents from $67 to $140.[2] The same increase would apply to enrolled retirement plan agents.[3]

Proposed regulations[1] dealing with changes made in the SECURE Act to required minimum distributions were released by the IRS. The proposed regulations do have some surprises for taxpayers, some not very welcome while others are fairly favorable.

Jeff Levine, CPA/CVA, CFP has a long Twitter thread in which he discusses these proposed regulations.[2]

We will be using his very useful summary as a guide to the key issues for this new set of proposed regulations.

In the case of Busch v. Commissioner, Tax Court Docket No. 14085-20S (Bench Opinion)[1] the taxpayers argued that they should not be subjected to penalties for understating their tax due to the fact they failed to notice their tax software only worked with full dollar amounts. Because of this, they overstated their mortgage interest deduction by factor of 100.

The AICPA and the state societies of CPAs on February 24, 2022[1] sent a letter to Lisa Batchelder, Assistant Secretary (Tax Policy) Department of Treasury and IRS Commissioner Charles P. Rettig asking for a delay in the requirement for partnerships and S corporations to complete and file Schedules K-2 and K-3 reporting items relevant to international tax reporting.

The IRS on February 16 modified its wage page on Schedules K-2 and K-3 for Forms 1065, 1120-s and 8865 to add question 15.

The IRS late on Tuesday issued the following statement by the National Public Liaison’s office as reported by Tax Notes Today:

The IRS intends to provide certain additional transition relief for this year from the Schedule K-2 and K-3 reporting for certain domestic partnerships and S corporations with no foreign activities, foreign partners, or shareholders, and without knowledge of partner or shareholder need for information on items of international relevance,” the agency said in a February 15 statement.

For 2021, these qualifying domestic partnerships and S corporations will not have to file the new schedules,” the statement continued. “We are taking this step in response to feedback we received from the tax community and our stakeholders. The IRS will provide full details of this relief soon.[1]

The IRS has announced a new Large Business and International Division Active Campaign on partnership losses in excess of partner’s basis.[1]

After implementing a freeze limited to a single notice on January 27[1] the IRS was criticized from many quarters, including the AICPA,[2] for taking such a limited action. The IRS has now announced they will be adding a number of other notices to put on pause while the IRS attempts to catch up on processing the backlog that already exists.[3]

The IRS has provided more information on its new policies related to claims for refund for research credits under IRC §41 in updates to its frequently asked questions (FAQ) page on research credit claims.[1] The IRS originally disclosed its new policies in FAA20214101F and an accompanying press release on October 15, 2021.

Under the revised IRS policy, every claim must contain five items of information at the time the claim is submitted. A claim omitting any of that information is deemed to not be a valid claim for refund and, in the view of the IRS, will also not qualify as an informal claim to preserve the taxpayer’s right to continue the challenge if the statute of limitations has passed on filing the claim when the claim is rejected.

Advisers have been noting that the IRS does not currently allow filing Schedules K-2 and K-3 electronically via MeF/XML, with the expected dates when such filing will be supported coming just after the original unextended due date for partnerships, but not until mid-June for S corporations. However, advisers should note that the IRS does provide an interim solution to attach PDFs of the forms to returns filed before the MeF/XML system is operational.[1]

IRS Director of the Office of Practice Sharyn Fisk stated that the IRS is looking at expanding functions available via the TaxPros account at the ABA Section of Taxation’s virtual meeting as reported by Tax Notes Today Federal in their February 7, 2022 edition.[1]

The IRS rolled out the TaxPros account in July 2021.[2] The primary feature it offered at that time was the ability to electronically submit a power of attorney or information authorization form online, with the taxpayer and tax professional signing the form online. While the system in the vast majority of cases provides the tax professional with access to transcript information immediately once both parties have signed electronically, the system only allowed these submissions for a limited of number of situations (with individual taxpayer matters being by far the most significant).

The IRS made modifications to the instructions for new partnership Schedules K-2 and K-3 (Form 1065)[1] that will require partnerships to either have all partners certify that certain information will not be necessary to complete some international tax related items on their return (including the Foreign Tax Credit) or complete the relevant portions of Schedule K-2 and K-3 and provide them to all partners that they are not aware will not need the information.

A similar statement and revision has been made to the instructions for the new S Corporation Schedules K-2 and K-3 (Form 1120S).[2]

Not all of the changes will cause increased reporting—in fact, some changes result in less work than would have been needed under the original instructions. But the changes made to the reporting of information that could impact a foreign tax credit calculation will create significant additional paperwork for many partnerships and S corporations.

In both cases the PDF with the instructions originally issued in September has not been updated to reflect these changes. Rather, taxpayers are expected to read these changes in addition to the PDF instructions.

The AICPA released what is, fundamentally, a critical response to the IRS statement on offering relief to taxpayers for automated notices,[1] stating “[t]he American Institute of CPAs (AICPA) believes this action is a positive first step, but believes that more should be and could be done by the IRS, without the need for congressional action, to reduce erroneous automated notices and unnecessary taxpayer contact with the Service.”[2]

The IRS has responded to growing pressure to provide some automated notice relief to taxpayers in a post to their website dated January 27, 2022.[1] The page provides a statement that both attempts to defend what the agency has done to date and provide information on actions being taken or that may be taken to reduce the automated notice issues that have drawn attention recently.

The IRS has added more clarification in the final Form 1120S instructions[1] about how expenses paid with PPP loan funds that lead to debt forgiveness should be treated in the computation of the accumulated adjustments account (AAA) and the other adjustments account (OAA).

On January 3, 2022, the IRS released draft instructions that first indicated that expenses paid with PPP loan proceeds should be treated as expenses related to tax exempt income under IRC §1368(e)(1)(A) and excluded from the calculation of AAA. However, some advisers weren’t sure how exactly this should be reported on Schedule M-2.

In final versions of instructions to Forms 1120S[1] and Form 1065,[2] the IRS has provided additional guidance on reporting PPP loan forgiveness on those forms using the methods outlined in Revenue Procedure 2021-48.