IRS & NYS DTF Matters —
Recent Developments &
2013 Regs. & Rulings of Note
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I.      IRS Matters

Final Regulations For Health Insurance

As of January 1, IRC § 5000A requires that all “non-exempt” individuals obtain “minimum essential healthcare coverage.” Final regulations governing penalties for noncompliance have been issued. (T.D. 9632).
The regulations provide, inter alia, that (i) if an individual has coverage or is exempt from coverage for a single day of the month, that individual will be so treated for the entire month; (ii) penalties will not be imposed for a failure to obtain coverage for less than three months; and (iii) an individual is liable for penalties for any dependent, whether or not the taxpayer claims the person as a dependent for the tax year.

Rev. Proc. 2013-35: Inflation-Adjusted Amounts for 2014

The inflation-adjusted amounts for exemptions and deductions for 2014 include (i) an estate, gift and GST exemption at $5.34 million; (ii) an annual gift tax annual exclusion of $14,000; (iii) an annual exclusion for gifts to non-citizen spouses at $145,000; (iv) a personal exemption of $3,950; and (v) a standard deduction of $12,400 for married taxpayers filing jointly; and $6,200 for married taxpayers filing separately and for individuals.

Final Regulations Governing Deductions for Tangible Property

The IRS has issued final regulations governing the deduction and capitalization of expenses relating to tangible personal property. In general, expenses must be capitalized if the amount paid is to “improve” property. Improvement occurs where amounts are expended (i) for the betterment of the property; (ii) to restore the property; or (iii) to adapt the property to a new or different use. (T.D. 9636). The regulations contain a number of safe harbors which dispense with the need to capitalize. Thus, amount paid for “routine maintenance” of a building, coop or condominium are not deemed to constitute improvements.

A qualifying small taxpayer may also expense, rather than capitalize, amounts paid for repairs, maintenance and improvements if the amount expended on such activities does not exceed the lesser of $10,000 or 2 percent of the unadjusted basis of the building. Finally, a taxpayer with an “applicable financial statement” (AFS) may rely on the safe harbor permitting expensing where the amount paid for property does not exceed $5,000 per invoice, or per item as substantiated by the invoice.

PLR 201310002: Nevada & Delaware Non-Grantor Trusts

PLR 201310002 blessed a theorized tax planning and asset protection strategy that fuses elements of grantor trusts, asset protection and trust taxation in a manner that accomplishes salient tax and asset protection objectives. These trusts are referred to as “Delaware Incomplete Non-Grantor Trusts,” or “Nevada Incomplete Non-Grantor Trusts.” The objectives are achieved by forming a nongrantor trust in a state with no income tax that also recognizes the ability of a grantor to establish a self-settled spendthrift trust. Once accomplished, the grantor, who resides in an income tax jurisdiction, will have avoided state income tax. No complete gift will have occurred at the time the trust is funded. Rather, a gift will occur only when the beneficiary receives a trust distribution, or when the grantor dies, at which time the remaining assets will be included in his estate.

New York is so irritated by the prospect of losing tax revenue from these trusts that a special tax commission has been charged with assessing the propriety of these trusts. However, it is doubtful that New York would prevail should the matter reach litigation by reason of the holdings in the following cases: In Mercantile-Safe Deposit & Trust Co. v. Com’r, 15 NY2d 579 (1964), the decedent, a New York resident, created a revocable inter vivos trust which became irrevocable at his death. The trust provided that upon his death, income would be paid to his surviving spouse, a New York resident. The trustee and the intangible property constituting corpus were at all times in the Delaware trustee’s “exclusive possession and control.”

Court of Appeals held that Due Process prohibited New York from imposing income tax on the Delaware Trustee. A later case, Taylor v. NYS Tax Commission, 445 N.Y.S.2d 648, 85 A.D.2d 821 (3rd Dept. 1981) held that under the 14th Amendment, “a state may not impose tax on an entity unless that state has a sufficient nexus with the entity, thus providing a basis for jurisdiction.” Codification of Taylor occurred through enactment of Tax Law §605(b)(3)(D)(I), which taxes such trusts created by New York residents as nonresident trusts.

More recently, in McNeil v. Pennsylvania, 2013 Pa. Comm. LEXIS 168 (2013), a Pennsylvania sate court held that an attempt by Pennsylvania to tax a trust settled by a Pennsylvania resident, but whose assets and trustees were all outside of Pennsylvania, violated the Commerce Clause of the Constitution. Therefore, as unhappy as New York may be with the IRS ruling which may effectively deprive New York of the ability to impose tax on such trusts, their validity may be upheld if challenged, and an attempt by New York to legislate their tax benefits out of existence could be doomed to failure.

Late S Corporate Election Relief

Rev. Proc. 2013-30 simplifies the procedure and expands the time available to obtain relief for various late S corporation elections (e.g., qualified subchapter S subsidiary , electing small business trust, qualified Subchapter S subsidiary, and corporate classification elections). The advice consolidates previous separate revenue procedures. Generally, taxpayers will now have 3 years and 75 days after the date the election was required to be effective to request relief. However, in some cases there is no deadline.

Relief From Unnecessary QTIP Elections

The IRS announced the circumstances where it will disregard an erroneously claimed QTIP election. One such circumstance is where an estate tax return was filed only because it was necessary to elect portability, and the decedent’s remaining applicable exclusion amount would have resulted in no federal estate tax. Rev. Proc. 2001-38. This ruling is consistent with the policy of the IRS with regard to administrative relief for mistaken QTIP elections in other circumstances.  See PLRs 201345006, 201338003 & 201338003.

Final Regulations Issued Re Net Investment Income Tax

The IRS in late November issued regulations governing the treatment of the disposition of interests in S corporations and partnerships for purposes of net investment income subject to the 3.8 percent Medicare tax. The regulations provide a “primary” method and an optional “simplified”” method, but restrict the use of the simplified method. The regulations also (i) clarified that capital losses may offset investment income; (ii) provided a safe harbor for real estate professionals that prevents rental income from being classified as net investment income; (iii) revised the method for properly calculating itemized deductions; (iv) partially allowed the use of net operating losses; and (v) allowed the regrouping of activities under the IRC §469 passive loss rules.

Equitable Innocent Spouse Relief

The IRS issued proposed regulations under IRC §6015 that eliminate the two-year statute of limitations for requesting equitable innocent spouse relief. Instead, the aggrieved spouse must now file a request for relief within the IRC §6502 period for collection of tax or the IRC §6511 period for requesting a tax refund. The IRS also acquiesced to Wilson v. Com’r, 2013-1 USTC ¶50,147, where the 9th Circuit countermanded the view of the IRS that the Tax Court may review an IRS determination with respect to innocent spouse relief only where the IRS had abused its discretion.

Broker Option Reporting Must Include Basis

In regulations, Treasury announced that effective January 1, 2014, brokers must now report the basis of options and other less complex debt instruments sold on behalf of individuals. Brokers will be required to report basis on more complex debt instruments on Janaury 1, 2016.  (T.D. 9616.)

II.      NYS-DTF Matters

Warrantless Income Executions

Pursuant to statutory authority, the Department of Taxation & Finance may now serve income executions (wage garnishments) on delinquent taxpayers without filing a warrant with the County Clerk. Officials of the Department have defended the measure, stating that the warrantless income executions will free the taxpayer from the stigma of having the income execution become a public record. The measure will expire on April 15, 2015.

Suspension of Drivers’ Licenses

The New York legislature has granted the Department of Taxation authority to require the Department of Motor Vehicles to suspend the drivers license of taxpayers with past-due liabilities exceeding $10,000, provided the taxpayer has been given 60 days notice. During that 60-day period the taxpayer may presumably satisfy the tax liability by paying the tax or otherwise entering into a payment arrangement with the Department. Affected taxpayers may receive an exemption for certain critical driving needs, such as commuting to work or for medical reasons.

E-File Mandate For Return Preparers

Tax preparers who prepare tax documents for more than 10 different taxpayers during any calendar year, and in a succeeding year prepares one or more “authorized” returns using tax software, must file all authorized tax documents electronically in that succeeding year as well as each year thereafter. The term “authorized” tax document means all returns except those returns or reports that cannot be filed electronically.

Department Opines That Lease Agreements Are Subject to Sales Tax

In an Advisory Opinion, the Department has stated that a 36-month lease agreement involving computer hardware, software, and office furniture was subject to sales tax at inception, rather than over the term of the agreement. The Department noted that although the transaction was evidenced by a lease agreement, that agreement bore the attributes of an installment agreement. TSB-A-13(20)S (7/15/13).