Here’s a look at recent tax-related happenings on the Hill, including the progress of proposed tax legislation, a request for an investigation on predatory promoters of employee retention tax credit claims, noteworthy court decisions, and other developments.
Lately on the Hill
All eyes are on House Speaker Mike Johnson (R-LA) as the Tax Relief for American Families and Workers Act of 2024 comes up for a possible vote this week. Right before the House left for recess last week, the House Ways and Means Committee resoundingly approved the legislation with a nearly unanimous show of bipartisan support, effectively demanding that the proposal be recognized by House and Senate leadership. Johnson has been relatively quiet on the bill, undoubtedly navigating the consequences of appeasing businesses and individuals with favorable tax breaks and possibly handing a perceived election-year win to the current presidential administration. Some Republican opposition to the bill remains, as currently drafted, as moderates still seek relief to the SALT deduction cap and others oppose the expanded child tax credit and lack of border security provisions. The legislation is likely to be considered under “suspension of the rules,” which would prevent additional amendments but require a two-thirds majority for passage.
In what may be a help to Johnson to shore up right-wing Republicans, FreedomWorks President Adam Brandon has urged followers to contact their representatives in support of the act. In a letter released by the organization, Brandon states: “The Tax Relief for American Families and Workers Act is a critical tax bill carefully negotiated on a bipartisan basis between the House Ways and Means Committee and the Senate Finance Committee. In a town where hyperpartisanship and near-constant messaging bills are unfortunately all too frequent, the Tax Relief for American Families and Workers Act represents one of the few opportunities that we may see this year to actually legislate and help taxpayers … FreedomWorks will count the vote on our 2024 Congressional Scorecard and reserves the right to score and weigh any related votes. The scorecard is used to determine eligibility for the FreedomFighter Award, which recognizes Members of the House and Senate who consistently vote to support economic freedom and individual liberty.”1
Members of the Senate will be closely watching how the bill proceeds in the House, with many already expressing their desire to make amendments to it. Sen. John Cornyn (R-TX) stated, “I want to get back to legislating. We can’t just have a deal between two people and then just say ‘Take it or leave it,’” in reference to the original purveyors of the legislation, namely, the House Committee on Ways and Means Chair Jason Smith (R-MO) and Senate Finance Committee Chair Ron Wyden (D-OR). A decisive bipartisan vote in the House may suppress Senate desires for additional changes to the bill and spur urgency to pass the legislation as the tax filing season ramps up, whereas a narrow partisan passage may embolden preferences for a Senate Finance Committee markup and further amendments to it. Certainly this would slow the process down or may even kill the legislation altogether.
In a letter to the Federal Trade Commission (FTC), a contingent of Democratic senators requested an investigation into whether “deceptive marketing and advertising practices” have been committed by predatory promoters, preparers, and business advisors recommending ineligible businesses to claim employee retention tax credits. The letter states, “the IRS cannot do its job [clearing nearly a million unprocessed claims] if it is complicated by the rampant levels of fraudulent and inaccurate claims, which creates longer wait times for legitimate claimants to receive relief.” The letter details the plight of eligible claimants who face a diminished impact of the program and potential loss of funds intended for them. The letter concludes: “As the enforcer of federal consumer protection laws that prevent fraud, deception, and other unfair business practices, it is incumbent upon the FTC to prevent the very practices taking place that are causing Americans to place themselves unknowingly in trouble.”
Excess contributions to an individual retirement account (IRA) are subject to a tax, not a penalty, under Section 4973. Couturier v. Commissioner, No. 19714-16, T.C. Memo 2024-6.
The petitioner’s $26 million contribution to his IRA was determined, by the IRS, to be an excess contribution under §4973(a), which imposes a 6% excise tax of the excess contribution amount. The excise tax applies to all years until the excess contribution is distributed to the taxpayer and included in income. The $26 million contribution originated from a buyout payment received, directly by his IRA, for his ESOP stock and relinquishment of interests held in nonqualified plans. The petitioner reported the $26 million as a nontaxable rollover contribution to his IRA. The IRS determined that the majority of the $26 million was attributable to the relinquishment of interests in the nonqualified plans, thereby making the transaction ineligible for a tax-free rollover. In response to the notices of deficiency issued by the IRS, the petitioner argued that §4973 imposes a penalty within the meaning of §6751 which would require supervisory approval to make such an assessment, which the petitioner asserted the IRS did not obtain. The IRS filed a motion seeking a ruling that §4973 imposes a tax, rather than a penalty, to which §6751 would not apply. The court considered the “plain and ordinary meaning of the text” which clearly and repeatedly utilizes the word “tax” within §4973 and never uses the word “penalty.” Furthermore, §4973 is situated in the Internal Revenue Code under Subtitle D “Miscellaneous Excise Taxes,” whereas Congress has generally utilized Subtitle F for penalties. The court rejected the petitioner’s argument that it should look beyond the text of §4973 and consider if the code section is penal in nature; instead, the court opted to rely on the Supreme Court’s instruction to refer to the statutory text for congressional intent.
Rental losses deemed passive as petitioner does not meet real estate professional requirements of §469. Gossain v. Commissioner, No. 21812-22
Real estate loss deductions amounting to $62,132 were limited by the IRS to the $25,000 special allowance for rental real estate activities with the remainder allowed as a carryforward. The court detailed under §469 that a rental activity is passive, excepting taxpayers meeting the definition under §469(c)(7)(B). This section applies if the taxpayer performs more than one-half and more than 750 hours of their personal services in real property trades or businesses in which the taxpayer materially participates (commonly referred to as a real estate professional, although such language is not found in the statute). The court found that while the petitioner met the trade or business and material participation requirements, he did not meet the 750-hour test (note that the petitioner’s wife’s hours could not be included in the test under §469(c)(7)(B)) and because the petitioner had a 40-hour-per-week job, he also was deemed to have failed the more than one-half of personal services test. Therefore, the petitioner could not be considered a real estate professional, and the losses were held as passive.
Other Important Developments
IRS Technical Guidance
- During January, many updated forms, instructions, and publications were finalized, including Form 1120, Form 1120-S (including Schedules K-1, K-2, K-3, and D), and Form 1065 (including Schedules K-1, K-2, and K-3 instructions), among others.
- Notice 2024-23 provides guidance that distributions from or distributions transferred to the Maryland Prepaid College Trust, a qualified §529 tuition program, will not be subject to the 12-month limitation described under §529(c)(3)(C)(iii). This section allows one tax-free rollover in a 12-month period. Due to administrative and system issues described in the notice, the IRS is granting relief for certain distributions, notwithstanding the limitation.
- IR-2024-18 reminds taxpayers that they must again answer the digital asset question and report all digital asset income when filing 2023 income tax returns. The wording to the question was revised and added to Forms 1041, 1065, 1120, and 1120-S. The basic question, tailored to the various taxpayers, is this: “At any time during 2023, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” All taxpayers must answer either yes or no.
- T.D. 9985 concerning final regulations titled “Federal Independent Dispute Resolution (IDR) Process Administrative Fee and Certified IDR Entity Fee Ranges” issued in December 2023 has received non-substantive technical corrections. Changes relate to the amendatory instructions and typographical errors in a title line.
- On February 8, 2024, the IRS is hosting a webinar on the Employee Retention Credit (ERC) Voluntary Disclosure Program. Attendees will learn about the advantages of the program, who can participate, what happens after application, other ERC resources, and a live Q&A. Registration can be completed on the IRS webinar website.
- IR-2024-19 introduces the IRS’ Simple Notice Initiative, an effort to simplify and clarify notices sent to taxpayers. IRS Commissioner Danny Werfel said, “Simplifying and clarifying these letters will make it easier for taxpayers to understand the tax issues involved. This will help reduce questions and save headaches for taxpayers, the tax professional community as well as the IRS. Improving these letters is also critical to our internal operations at the IRS, and an important part of our transformation efforts. Clearer letters can create a ripple effect, reducing taxpayer phone calls and visits and freeing up IRS staff to help others.”
- IR-2024-17 announces relief for individuals and businesses affected by storms, flooding, and a potential dam breach in certain areas in Connecticut, currently including New London County, Mohegan Tribal Nation, and Mashantucket Pequot Tribal Nation. These taxpayers have until June 17, 2024 to file tax returns and make tax payments. The relief also applies to extensions, although any extension filed between April 15 and June 17 will have to be paper filed.
- 89 FR 4215 requests information in compliance with §319 of the SECURE 2.0 Act of 2022. The section requires the U.S. Department of the Treasury, the Employee Benefits Security Administration, and the Pension Benefit Guaranty Corporation to review reporting and disclosure requirements for certain retirement plans under the Employee Retirement Income Security Act of 1974 (ERISA). The purpose is to obtain input from the public on the effectiveness of ERISA requirements that the listed agencies can consider while preparing the required report to Congress and to enhance effectiveness.
Continued Coverage of the Inflation Reduction Act (IRA)
- Draft instructions for new Form 7210 for companies claiming the §45V clean hydrogen production credit have been released. The draft Form 7210 was released in August 2023 and proposed regulations related to the credit were published in December 2023.
This newsletter features developing content that is subject to change at any time. It does not constitute legal or tax advice. Consult your professional advisors prior to acting on the information set forth herein.
- 1“Key Vote YES on the Tax Relief for American Families and Workers Act, H.R. 7024,” freedomworks.org, January 25, 2024.