I. IRS Matters – August 2014
Tax News & Comment — August 2014
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On July 11, a second federal judge ordered the IRS to account for missing emails of former director Lois Lerner. U.S. District Court Judge Reggie Walton has demanded an affidavit from an “appropriate official” of the IRS explaining what happened to Lerner’s hard drive, and “why the computer hard drive cannot be identified and preserved.” In April, IRS Commissioner John Koskinen withstood sometimes withering interrogation before Congress concerning the two years’ lost emails, at times responding to Congressional questioners combatively. Mr. Koskinen steadfastly defended the integrity of the IRS. Although the Obama administration has laid blame on bureaucratic incompetence, conservatives allege the targeting of individuals and groups whose policies are adverse to those of the Administration. Congressional hearings continue.
DC Court of Appeals Affirms IRS May Not Regulate Return Preparers
The Court of Appeals for the D.C. Circuit has upheld a District Court decision finding that the statutory authority of the IRS is not so broad that it may regulate tax return preparers. S Loving, CA-D.C., 2014-1 USTC ¶50,175. [To combat tax-return fraud, the IRS had promulgated test-taking and continuing education requirements on hundreds of thousands of unlicensed return preparers. In 2012, a Libertarian group filed suit, which resulted in an injunction in January, 2013 preventing the IRS from attempt to regulate return preparers.] In response to the decision, the IRS announced a “program” to begin in 2015, which will encourage tax return preparers to pursue continuing education.
Lump-Sum Distributions Sanctioned
In four published rulings, the IRS announced that retirees in pay status may make a one-time election to receive remaining benefits in a lump sum without violating the minimum distribution rules under IRC § 401(a)(9), which otherwise preclude — under penalty of an excise tax under IRC §4974 — increased annuity payments, once annuity payments had commenced. PLRs 201422028 – 31.
IRS Announces Changes to Offshore Voluntary Disclosure Program
Under the Offshore Voluntary Disclosure Program (OVID) a taxpayer who comes forward, remedies previous filing errors, and pays the appropriate tax, interest and penalties, may avoid criminal exposure. New streamlined procedures (i) eliminate the requirement that the taxpayer owe liabilities of $1,500 or less of unpaid taxes in a given tax year to qualify; (ii) eliminate the “risk” questionnaire; but now (iii) require that the taxpayer certify that previous failures were non-willful. On the other hand, the offshore penalty, now 27.5 percent, will increase to 50 percent on August 1, 2014, if an identified “facilitator” currently under investigation by the IRS assisted the taxpayer in maintaining the offshore account. Banks current among those under criminal investigation (and on that list) include UBS, Credit Suisse AG, Swisspartners Investment Network AG, and The Hong Kong and Shanghai Banking Corp. Limited in India. IR-2014-73, 6/18/14.
TIGTA: IRS Should Improve Controls
The Treasury Inspector General for Tax Administration (TIGTA) has recommended that the IRS modify its handling of the approximately four million amended returns filed annually. The recommendation followed a TIGTA audit whose objective was to determine whether the Service had appropriate controls in place to ensure that refund claims were valid. TIGTA determined that based upon a statistical sample the IRS may have refunded more than $439 million in erroneous tax refunds on 187,400 amended returns in fiscal year 2012. TIGTA also recommended that IRS permit taxpayers to efile amended returns.
EAT May Serve Three Affiliates
The IRS has approved the use of a parking arrangement whereby an exchange accommodation titleholder (EAT) parks replacement property for a taxpayer and two affiliates. The ruling states that each of the three entities may enter into separate qualified exchange accommodation agreements (QEAAs) for the same parked replacement property. Within 45 days, each of the three entities may identify potential relinquished property, but only one of the three may actually proceed with the exchange by acquiring the parked property. The PLR is unique that the arrangement is not invalid merely because the same parked property may serve as potential replacement property for three related entities. The transaction is structured such that once one of the three decides to go forward and notifies the EAT of its intention to close on the parked property, the rights of the other affiliates to acquire the parked property become extinguished.
Taxpayer May Exchange Into Property Owned by Affiliate
The IRS expanded the usefulness of reverse exchanges involving improvements to property owned by a related party. PLR 201409109 is interesting in that the mere interposition of a qualified intermediary seemed to be enough to leverage the non-tax avoiding purpose of the exchange above the principle that a taxpayer may not exchange into property it already owned. [Bloomington Coca-Cola v. Com’r, 189 F2d 14 (7th Cir. 1951) denied exchange treatment where the taxpayer attempted to exchange into property improved by a contractor but already owned by the Coca-Cola. PLR 2004-51 extended the holding to situations where the taxpayer had owned the property within 12 months of the exchange.] Here, the taxpayer sought to exchange into property acquired by an EAT from its related affiliate, parked and improved the property, and then transferred the property to the taxpayer in the form of a 30-year lease within 180 days in an “exchange last” reverse exchange. The IRS blessed the transaction, concluding that the related party rules were inapplicable since (i) the QI was unrelated to either the taxpayer or the affiliate; (ii) the taxpayer had not “cashed out,” and (iii) neither the taxpayer nor the related affiliate leasing the property to the taxpayer intended to dispose of their interests within 2 years.
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IRS & NYS DTF Matters — August 2014
I. IRS Matters – August 2014
Tax News & Comment — August 2014
View or Print
On July 11, a second federal judge ordered the IRS to account for missing emails of former director Lois Lerner. U.S. District Court Judge Reggie Walton has demanded an affidavit from an “appropriate official” of the IRS explaining what happened to Lerner’s hard drive, and “why the computer hard drive cannot be identified and preserved.” In April, IRS Commissioner John Koskinen withstood sometimes withering interrogation before Congress concerning the two years’ lost emails, at times responding to Congressional questioners combatively. Mr. Koskinen steadfastly defended the integrity of the IRS. Although the Obama administration has laid blame on bureaucratic incompetence, conservatives allege the targeting of individuals and groups whose policies are adverse to those of the Administration. Congressional hearings continue.
DC Court of Appeals Affirms IRS May Not Regulate Return Preparers
The Court of Appeals for the D.C. Circuit has upheld a District Court decision finding that the statutory authority of the IRS is not so broad that it may regulate tax return preparers. S Loving, CA-D.C., 2014-1 USTC ¶50,175. [To combat tax-return fraud, the IRS had promulgated test-taking and continuing education requirements on hundreds of thousands of unlicensed return preparers. In 2012, a Libertarian group filed suit, which resulted in an injunction in January, 2013 preventing the IRS from attempt to regulate return preparers.] In response to the decision, the IRS announced a “program” to begin in 2015, which will encourage tax return preparers to pursue continuing education.
Lump-Sum Distributions Sanctioned
In four published rulings, the IRS announced that retirees in pay status may make a one-time election to receive remaining benefits in a lump sum without violating the minimum distribution rules under IRC § 401(a)(9), which otherwise preclude — under penalty of an excise tax under IRC §4974 — increased annuity payments, once annuity payments had commenced. PLRs 201422028 – 31.
IRS Announces Changes to Offshore Voluntary Disclosure Program
Under the Offshore Voluntary Disclosure Program (OVID) a taxpayer who comes forward, remedies previous filing errors, and pays the appropriate tax, interest and penalties, may avoid criminal exposure. New streamlined procedures (i) eliminate the requirement that the taxpayer owe liabilities of $1,500 or less of unpaid taxes in a given tax year to qualify; (ii) eliminate the “risk” questionnaire; but now (iii) require that the taxpayer certify that previous failures were non-willful. On the other hand, the offshore penalty, now 27.5 percent, will increase to 50 percent on August 1, 2014, if an identified “facilitator” currently under investigation by the IRS assisted the taxpayer in maintaining the offshore account. Banks current among those under criminal investigation (and on that list) include UBS, Credit Suisse AG, Swisspartners Investment Network AG, and The Hong Kong and Shanghai Banking Corp. Limited in India. IR-2014-73, 6/18/14.
TIGTA: IRS Should Improve Controls
The Treasury Inspector General for Tax Administration (TIGTA) has recommended that the IRS modify its handling of the approximately four million amended returns filed annually. The recommendation followed a TIGTA audit whose objective was to determine whether the Service had appropriate controls in place to ensure that refund claims were valid. TIGTA determined that based upon a statistical sample the IRS may have refunded more than $439 million in erroneous tax refunds on 187,400 amended returns in fiscal year 2012. TIGTA also recommended that IRS permit taxpayers to efile amended returns.
EAT May Serve Three Affiliates
The IRS has approved the use of a parking arrangement whereby an exchange accommodation titleholder (EAT) parks replacement property for a taxpayer and two affiliates. The ruling states that each of the three entities may enter into separate qualified exchange accommodation agreements (QEAAs) for the same parked replacement property. Within 45 days, each of the three entities may identify potential relinquished property, but only one of the three may actually proceed with the exchange by acquiring the parked property. The PLR is unique that the arrangement is not invalid merely because the same parked property may serve as potential replacement property for three related entities. The transaction is structured such that once one of the three decides to go forward and notifies the EAT of its intention to close on the parked property, the rights of the other affiliates to acquire the parked property become extinguished.
Taxpayer May Exchange Into Property Owned by Affiliate
The IRS expanded the usefulness of reverse exchanges involving improvements to property owned by a related party. PLR 201409109 is interesting in that the mere interposition of a qualified intermediary seemed to be enough to leverage the non-tax avoiding purpose of the exchange above the principle that a taxpayer may not exchange into property it already owned. [Bloomington Coca-Cola v. Com’r, 189 F2d 14 (7th Cir. 1951) denied exchange treatment where the taxpayer attempted to exchange into property improved by a contractor but already owned by the Coca-Cola. PLR 2004-51 extended the holding to situations where the taxpayer had owned the property within 12 months of the exchange.] Here, the taxpayer sought to exchange into property acquired by an EAT from its related affiliate, parked and improved the property, and then transferred the property to the taxpayer in the form of a 30-year lease within 180 days in an “exchange last” reverse exchange. The IRS blessed the transaction, concluding that the related party rules were inapplicable since (i) the QI was unrelated to either the taxpayer or the affiliate; (ii) the taxpayer had not “cashed out,” and (iii) neither the taxpayer nor the related affiliate leasing the property to the taxpayer intended to dispose of their interests within 2 years.
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