The IRS again succeeded in showing that a taxpayer had failed to timely obtain a contemporaneous written acknowledgement (CWA) required by IRC §170(f)(8) related to a charitable contribution in the case of Brooks v. Commissioner, TC Memo 2022-122.[1]

While there are two other issues the IRS and the Tax Court find fault with for the taxpayer, note that the Court yet again states a failure to comply with the CWA provisions of IRC §170(f)(8) results by itself in an entire denial of the charitable contribution deduction.

The IRS in News Release IR-2022-220[1] reminded taxpayers that the second payment of deferred employer Social Security and self-employment taxes is due no later than December 31, 2022.  The release reminds taxpayers of this COVID-19 relief provision that applied in 2020, allowing affected taxpayers to defer paying these taxes:

As part of the COVID relief provided during 2020, employers could choose to put off paying the employer's share of their Social Security tax liability, which is 6.2% of wages. Self-employed individuals could also choose to defer a similar amount of their self-employment tax. Generally, half of that deferral was due on December 31, 2021. The other half is due on December 31, 2022.[2]

While the IRS sent notices to impacted taxpayers earlier this fall per the release, the agency reminded taxpayers they must still make this payment even if they did not receive the notice.

The IRS has released guidance providing for automatic permission to change a taxpayers’ method of accounting for IRC §174 research and experimental expenditures in Revenue Procedure 2023-8.[1]  The guidance modifies Section 7 of Revenue Procedure 2022-14, which previously provided for an automatic change to the treatment of research and experimental expenditures under IRC §174.

The IRS addressed a structure the agency states is being marketed to law firms that claims to defer the taxation of legal fees in AM 2022-007.[1]  The IRS found that the transaction, which purported to defer taxation of a fee from 2021 to August of 2031, did not result in the deferral of the income, outling multiple theories that would cause immediate inclusion of the income.

The IRS in Announcement 2022-28[1] explained the reasons why it issued proposed regulations[2] involving certain syndicated conservation easement cases.

The IRS has now revised the draft Schedule K-2 and K-3 (Form 1065) instructions[1] issued on October 26, 2022, issuing a new draft Schedule K-2 and K-3 (Form 1065) instructions that make important changes to the domestic filing exception. While no revised S corporation instructions have been issued as of the time this is being written, it seems likely similar changes will be made to those instructions.

Key Changes

The following are the key changes made to the domestic filing exception in the new revised draft instructions.

• The notice to partners no longer must be issued by January 15, 2023. Rather, it can be issued as late as the date the Schedules K-1 are provided to the partners and even provided as an attachment to the Schedule K-1

• The 1-month date, for both the domestic filing exception and the Form 1116 exception, will now be one month before the Form 1065 is filed, so as late as August 15, 2023 for a calendar year partnership return placed on extension. one month before the due date for filing including extensions, which means it will move to August 15, 2023, if the partnership files for an automatic extension of time to file a calendar year return

• The list of US citizen/resident alien partners is now expanded to include S corporations with a single shareholder and single member LLCs owned whose owner is listed as an eligible US citizen/resident alien partner.

In the case of Dunn v. Commissioner, TC Memo 2022-112,[1] the taxpayers lost deductions for claimed depreciation on an automobile and losses from a partnership they wholly owned that held real estate.

The IRS has issued the first guidance related to provisions in the Inflation Reduction Act of 2022 in Notice 2022-61.[1] The Notice provides guidance on the prevailing wage and apprenticeship provisions that provide for increased tax benefits under IRC §§ 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, 48E, and 179D. The Notice also establishes the 60-day period applicable under the provisions and guidance on determining the beginning of construction or beginning of installation.

Some taxpayers may prefer to use a limited liability company (LLC) as the underlying legal entity in which to form what is intended to be, for tax purposes, an S corporation. It may be due to quirks in state law (as is true in my home state of Arizona) or some other reason. But what is too often overlooked is that the LLC’s operating agreement must not create a situation where there is deemed to be multiple classes of “stock” outstanding, or the LLC will not qualify as an S corporation.

This very issue forced taxpayers to pay for and seek an IRS ruling that the termination of their S corporation status was inadvertent in the ruling found at PLR 202247004.[1]

The taxation of legal settlements creates a lot of confusion, with taxpayers and their advisers not realizing that, most often, such settlements are going to be considered taxable income. One such recent case is that of Tillman-Kelly v. Commissioner, TC Memo. 2022-111.[1]

Since 2020 tax advisers and their clients have been a bit frustrated with how slowly the IRS processes returns, especially amended returns. But, in the case of Lofton v. United States,[1] the taxpayer grew impatient about the IRS delays and attempted to get the matter resolved in Court.

Unfortunately for the taxpayer, while the law allows taxpayers to pursue relief in the courts if the IRS fails to rule on their request for a refund, that law also mandates that the IRS be given six months to act on the request

The IRS granted a taxpayer who had been the victim a fraud an extension of time beyond the 60-day deadline to complete a rollover of her IRA funds in PLR 202244029.[1]

In the case of Olsen v. Commissioner, CA10, CIR No. 26469-14 & No. 21247-16,[1] the Tenth Circuit Court of Appeals affirmed a Tax Court decision denying various tax benefits to the taxpayers related to the purchase of solar lenses. The panel agreed with the Tax Court that the taxpayers had no profit motive in the supposed business for which the lenses were purchased, rather using benefits from depreciation and tax credits on those lenses to obtain a tax benefit in excess of the cash they had paid to the promoter.

The IRS on October 25, 2022, released a draft copy of the instructions for Schedules K-2 and K-3 of Form 1065 for 2022 tax returns.[1] The draft contains a new formalized program for obtaining information from partners related to reporting on information that impacts information required to be provided to partners for possible use on Forms 1116 and 1118.

This release of the instructions was noted on the “Schedules K-2 and K-3 Frequently Asked Questions (Forms 1065, 1120S, and 8865)” FAQ on the IRS website update on October 26, which read:

27. When will the 2022 draft instructions for the Schedules K-2 and K-3 be released and where can I find them? (added October 26, 2022)

On October 25, 2022, the IRS released drafts of the 2022 Partnership Instructions for Schedules K-2 and K-3 and the 2022 Partner’s Instructions for Schedule K-3 for the Form 1065. In response to stakeholder input, the draft instructions provide a new filing exception as described on page 3 of the 2022 Partnership Instructions for Schedules K-2 and K-3. Comments on the draft instructions can be provided to lbi.passthrough.international.form.changes@irs.gov on or before November 8, 2022.[2]

The IRS has released Revenue Procedure 2022-38[1] that contains most of the other inflation adjusted numbers for 2023 taxes.

As the numbers relate to the law as it existed at the date of publication of the procedure, something that could change based on pending Congressional action, the procedure contains the following warning:

This revenue procedure sets forth inflation-adjusted items for 2023 for various Code provisions as in effect on October 18, 2022. The inflation adjusted items for the Code sections set forth in section 3 of this revenue procedure are generally determined by reference to § 1(f) of the Code. To the extent amendments to the Code are enacted for 2023 after October 18, 2022, taxpayers should consult additional guidance to determine whether these adjustments remain applicable for 2023.[2]

On Monday at the American Bar Association Section of Taxation meeting, Timothy McCormally of the IRS Office of Professional Responsibility was quoted by Tax Notes Today Federal as announcing “a practitioner priority hotline enhancement which is an effort to deal with robocalls into the IRS, and specifically the autodialer programs…”[1]

The article went on to quote Mr. McCormally as stating that the IRS would use an artificial intelligence tool to sort out automated calls and prevent “line-cutting through technology.”[2] While the article did not provide a date when the pilot program would begin to be rolled out, the article quoted Mr. McCormally as saying that it would be soon.[3]

In Revenue Procedure 2022-19[1] the IRS has issued a series of “taxpayer assistance procedures” to resolve certain issues involving S corporations and their shareholders without requiring the issuance of a private letter ruling (PLR).

The areas covered by this guidance are:

• Agreements and Arrangements with No Principal Purpose to Circumvent One Class of Stock Requirement

• Governing Provisions That Provide for Identical Distribution and Liquidation Rights

• Procedures for Addressing Missing Shareholder Consents, Errors with Regard to a Permitted Year, Missing Officer's Signature, and Other Inadvertent Errors and Omissions

• Procedures for Verifying S Elections or QSub Elections

• Procedures for Addressing a Federal Income Tax Return Filing Inconsistent with an S Election or a QSub Election

• Procedures for Retroactively Correcting One or More Non-Identical Governing Provisions[2]

The IRS in Notice 2022-53[1] has announced that the agency will not impose penalties on failures to take specified RMDs for 2021 and 2022 that were required under provisions of proposed regulations issued to deal with changes in required minimum distributions under the SECURE Act passed in late 2019.

The AICPA Tax Executive Committee has released another letter[1] to the IRS regarding additional guidance needed for the state passthrough entity taxes beyond what was provided in Notice 2020-75.[2]

The AICPA summarizes their requests in this letter as follows:

We recommend:

1. The SITP liability is deductible in accordance with the partnership or S corporation’s method of accounting.

2. The SITP liability is a specifically identified tax and accordingly, a taxpayer should be entitled to adopt the recurring item exception method of accounting with respect to the liability.

3. An entity that is unable to make an entity level election until a year subsequent to the taxable year of imposition should be allowed to make a Federal election to deduct the tax in the taxable year of imposition or the following year (similar to the treatment of plan contributions made on account of a tax year but after the year they relate to under section 404(a)(6)).[3]

The US District Court for Middle District of Tennessee dismissed the suit in the case of Jarrett et al v. United States[1] as moot as the United States had granted the requested refund.

For those who may not remember this case, it involved an attempt by the taxpayers in question to get a federal court to rule that staking rewards do not generate taxable income. While the IRS initially denied the taxpayers’ claim for a refund, after the case was filed the IRS authorized the refund plus interest.