The U.S. Court of Federal Claims rejected a taxpayer’s argument that the IRS improperly allowed the offset of a tax refund on his 2019 return filed in January 2020 against his outstanding student loan debt in violation of the CARES Act. As the opinion pointed out in the case of Seto v. United States, US Court of Federal Claims, Docket No. 1:21-CV-01497[1], since the offset took place over a month before the CARES Act was signed into law, there was no relief available that would enable him to recover his refund.

The taxpayer in the case of Evert v. Commissioner, TC Memo 2022-48[1] argued that she had signed a Form 872, Consent to Extend the Time to Assess Tax, under duress, rendering it invalid and, thus, the IRS had failed to timely issue a notice of deficiency for 2015. The Tax Court did not agree with the taxpayer.

The Tax Court ruled that the IRS Chief Counsel has the ultimate say on whether an individual qualifies for innocent spouse relief even though the Cincinnati Centralized Innocent Spouse Operation (CCISO) determined the taxpayer was entitled to relief when the request for relief initially arises as part of litigation in Tax Court.[1]

The case is interesting since the IRS itself disagreed over whether the taxpayer should be granted innocent spouse relief. As the Court notes:

What concerns us is her effort to be relieved of her liability on the joint tax returns she filed with Goddard while they were married. The part of the IRS bureaucracy that usually handles these sorts of requests thinks she’s entitled to relief. The IRS’s lawyer disagrees. We must decide who speaks for the IRS.[2]

In Revenue Procedure 2022-24[1] the IRS has announced the inflation-adjusted amounts for Health Savings Accounts (HSAs) for 2023.

The Tax Court agreed with the IRS that a disabled Army veteran could only exclude from income the designated disability payments she received from the Veterans’ Administration, while the payments she received separately as part of her military retirement payments were taxable in the case of Valentine v. Commissioner, TC Memo 2022-42.[1]

The IRS has updated information in Question 7 in “Schedules K-2 and K-3 Frequently Asked Questions (Forms 1065, 1120S, and 8865)” found on the IRS website.[1} The question now discloses that the electronic filing version of the 1065 Schedules became available on March 20 and that the S corporation electronic filing option will be available on July 24, 2022. As well, the question indicates that taxpayers may use the PDF attachment filing option for the entire 2022 filing season.

In the case of Aspro v. Commissioner, Case No. 21-1996, CA8,[1] the Eighth Circuit Court of Appeals sustained the Tax Court’s disallowance of a deduction of management fees paid to shareholders of a C corporation and the treatment of the payment as disguised distributions taxable as dividends.

There are various reasons why some closely held entities make payments to related parties that are labeled management fees. In this case we aren't told what the ultimate goal was of such fees, but we do know that they had continued for an extremely long period of time.

In proposed regulations, the IRS sought to block potential methods that might be used to extend the increased basic exclusion amount should it be allowed to drop back to a lower level after the end of 2025.[1]

The IRS had previously released what have been referred to as anti-clawback regulations in 2019. The regulations sought to prevent an estate from facing a tax bill if the basic exclusion amount (BEA) drops below amounts that have been gifted during life that were covered by the BEA applicable at the time of the gift, when the BEA has now dropped below the amount of those gifts. The regulations explain this as follows:

On November 26, 2019, the Treasury Department and the IRS published final regulations under section 2010 (TD 9884) in the Federal Register (84 FR 64995) to address situations described in section 2001(g)(2) (final regulations). The final regulations adopted §20.2010-1(c), a special rule (special rule) applicable in cases where the credit against the estate tax that is attributable to the BEA is less at the date of death than the sum of the credits attributable to the BEA allowable in computing gift tax payable within the meaning of section 2001(b)(2) with regard to the decedent’s lifetime gifts. In such cases, the portion of the credit against the net tentative estate tax that is attributable to the BEA is based on the sum of the credits attributable to the BEA allowable in computing gift tax payable regarding the decedent’s lifetime gifts. The rule ensures that the estate of a donor is not taxed on completed gifts that, as a result of the increased BEA, were free of gift tax when made.[2]

Rental activities are generally treated as passive activities under IRC §469, limiting the ability of taxpayers to offset losses from such activities against other income. However, a special rule applies to individuals who can meet the qualifications to be a real estate professional under IRC §469(c)(7). The taxpayers in the case of Sezonov v. Commissioner, TC Memo 2022-40,[1] attempted unsuccessfully to argue they qualified for this status.

A retired airline pilot attempted to dispute the IRS’s position that he had to pay tax on the value of airline tickets on his former employer’s flights used by relatives other than his spouse in the case of Mihalik v. Commissioner, TC Memo 2022-36.[1]

On April 11, 2022, the IRS expanded its page of frequently asked questions with regard to Schedules K-2 and K-3 from 18 questions and answers to 26.[1] While this falls far short of covering all of the questions many have remaining with regard to completing these forms, it does provide some additional guidance.

The US Supreme Court has refused to hear the state of New York’s appeal of a Second Circuit ruling finding that the $10,000 state and local tax deduction cap enacted in 2017 as part of the Tax Cuts and Jobs Act was unconstitutional.[1]

In Revenue Procedure 2022-23,[1] the IRS has given guidance on making late elections under IRC sections 168(j), 168(l)(3)(D) and 181(a)(1) which were retroactively extended by Congress to apply to years 2018 and 2019 in the Further Consolidated Appropriations Act, 2020 enacted at the end of 2019.

The IRS argued before the Tax Court that the Court had no right to determine if the IRS had properly determined that a corporation was not eligible for the voluntary classification settlement program (VCSP) for payroll taxes. In a published decision, Treece Investment Advisory Corp v. Commissioner, 158 TC No. 6,[1] the Tax Court disagreed, holding that the Court did have jurisdiction to review the IRS determination in this area.

The Treasury Department and the IRS announced a program that aims to deal with the backlog of unprocessed tax returns and correspondence on March 10.[1]

The press release begins by noting the current situation:

This year, millions of taxpayers are awaiting the processing of their tax returns and receipt of their refunds. The backlog—unprocessed returns and correspondence sent to the IRS but yet unanswered—has created one of the most challenging tax filing seasons in our nation’s history.[2]

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.

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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]