Here’s a look at recent tax-related happenings on the Hill, including looming deadlines on two sets of appropriations bills while tax-relief legislation faces possible action in the Senate.
Lately on the Hill
Both chambers of Congress reconvene from their winter recess this week with a full agenda of competing priorities.
In the House, government funding is at top of mind as two sets of appropriations bills are quickly coming due March 1 and 8. To avoid a partial government shutdown, legislation must be passed in a few short days, or perhaps face a third round of continuing resolutions. Interestingly, the appropriations committee will soon begin working on the 2025 fiscal year (FY) appropriations, possibly before FY 2024 is even enacted. Also pressing, the Senate passed a $95 billion foreign aid bill with provisions for Ukraine and Israel. House Speaker Mike Johnson (R-LA) and his constituents oppose the bill due to the lack of border security funding and will seek changes to the bill before voting on it. Pressure to continue funding for the war in Ukraine mounts as supplies dwindle and Russia continues to make gains.
In the Senate, representatives of the House will present articles of impeachment of the Secretary of Homeland Security Alejandro Mayorkas. While the Senate is not expected to remove Mayorkas from office, the procedural requirements pertaining to articles of impeachment will have to be fulfilled. The Senate also will have to do its part in passing appropriations bills this week, if the House does indeed present them, or support another continuing resolution to prevent a lapse in government funding. Then there is, of course, the Tax Relief for American Families and Workers Act of 2024 (Act) passed by the House and awaiting legislative action by the Senate. The Act would provide significant benefits to families and businesses alike, including an expanded Child Tax Credit, 100% bonus depreciation, research and experimental expenditure expensing, and an increased business interest deduction limitation.
Whether the Act will be enacted remains up in the air. The best hope for expedited passage would be to attach the bill to the forthcoming appropriations measures. This method would limit debate and amendments to the bill as it currently stands. Alternatively, as a standalone bill, the Act will face a tougher road as senators would have their crack at amending it, which would then require additional votes by the House before it could be enacted.
Noteworthy Decisions
A syndicated conservation easement charitable deduction is disallowed due to the lack of a qualified appraisal and no evidence of basis. Oconee Landing Property, LLC et al. v. Commissioner, No. 11814-19, T.C. Memo 2024-25.
Oconee Landing Property, LLC (Oconee) claimed a $20.67 million charitable contribution deduction for its donation of a conservation easement. The IRS examined the return on which the deduction was taken and disallowed the deduction based on Oconee’s lack of donative intent, the appraisal attached to the tax return was not a “qualified appraisal” because the appraisers did not meet the definition of “qualified appraisers,” and the property was “ordinary income property” limiting the deduction to its basis, which Oconee could not prove was greater than zero.
The U.S. Tax Court rejected the lack of donative intent argument as the property was donated to a charitable organization and the property had value.
The court agreed that the appraisal was not “qualified” since the appraisers also were not “qualified” under the Section 1.170A-13(c)(5)(ii) exception stating, “if the donor had knowledge of facts that would cause a reasonable person to expect the appraiser falsely to overstate the value of the donated property.” Oconee for years had tried to sell the property for about $7 million without avail, and it therefore knew that the $60 million valuation provided by the appraisers was very much overstated. Oconee made it known that it sought at least $7 million of proceeds to engage in the syndicated transaction, which required a $60 million valuation, a value the court determined was agreed upon in advance between Oconee and the appraisers.
The court agreed that the property was ordinary income. Prior to the property’s contribution to Oconee, it had been held for sale in the ordinary course for the contributor’s real estate business. Under §724(b), the property would retain its character as ordinary income property by Oconee. Under §170(e)(1)(A), a deduction for the donation of a conservation easement is limited to its basis as ordinary income property. The only information that Oconee provided as to the value of the property’s basis was the figure reported on the contributor’s tax return, which did not constitute as evidence of the property’s value. Without such support, the basis could only be determined to be zero.
The U.S. Tax Court determines a capital contribution in lieu of settlement proceeds is a sham transaction lacking business purpose and economic substance. Acqis Technology, Inc. v. Commissioner, No. 9261-17, T.C. Memo 2024-21.
Acqis Technology, Inc. (Acqis) operated as a patent licensing entity. As Acqis’ patent portfolio strengthened, it began pursuing patent infringement lawsuits against many large technology companies. In exchange for a reduced settlement amount, Acqis requested that the companies become shareholders of Acqis by purchasing shares in it. The companies agreed to the settlement and purchased shares in Acqis. Acqis argued that the purpose of the settlement was to partner with large technology firms to “amplify [its] stature and legitimacy.” The commissioner asserted that the settlements were sham transactions to avoid tax that would be due on the settlements’ proceeds in favor of nontaxable capital contributions.
The court explained that the sham transaction doctrine originated from Gregory v. Helvering, which has since been expanded by the courts. Sham transactions can come in two forms: factual shams—transactions that never took place, and economic shams—transactions that lack economic substance. The court stated, “[i]f a commonsense review of a particular transaction leads to the conclusion that the transaction does not have a nontax business purpose or any economic substance other than the creation of tax benefits, the form of that transaction may be disregarded, and the Commissioner may rely on its underlying economic substance for tax purposes.”
The court found Acqis’ assertion unconvincing considering the terms of the settlement prevented Acqis from publicizing the arrangement or disclosing the names of the new partners, among other factors. The court ruled “[w]hat pretended to be a purchase of Acqis shares was really a settlement payment for patent infringement damages and a licensing fee. The transaction before us lacks both business purpose and economic substance and is a sham.”
Other Important Developments
IRS Technical Guidance
- Notice 2024-26 announces that U.S. and foreign withholding agents are exempt from electronic filing requirements related to Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, for calendar year 2024. Foreign withholding agents also are exempt for calendar year 2025. For tax years ending on or after December 31, 2023, the mandatory e-file threshold has been reduced from 250 to 10. The IRS received feedback from withholding agents concerning the challenges of this requirement, especially since there are only a limited number of approved IRS e-file providers for the form.
- Announcement 2024-10 addresses income tax treatment of governmental programs to ameliorate lead service lines. The IRS has determined that the payments to residential property owners to replace privately owned lines do not result in taxable income. Furthermore, payors such as public water systems and state governments are not required to file information returns, e.g., Form 1099-Misc, related to these payments.
- The IRS has published Technical Guide 8 on fraternal beneficiary societies and domestic fraternal societies under Internal Revenue Code §501(c)(8) and §501(c)(10). The guidance discusses the law, regulations, and federal income tax issues concerning these societies.
Employee Retention Credit (ERC)
- IRS Tax Tip 2024-09 urges businesses to review their eligibility for the ERC as time is running out to voluntarily resolve incorrect claims. Businesses that received the credit but are not eligible have until March 22, 2024 to apply for the ERC Voluntary Disclosure Program. Businesses that have claimed but not yet received the credit also can withdraw their claims.
- The IRS’ Office of Chief Counsel issued a memorandum advising that third-party payers (TPP) can be liable for underpayments of employment tax resulting from improper ERC claims. Employers may contract with a TPP to handle payroll functions such as paying wages and filng employment tax returns under its own EIN rather than the EIN of the employer. The memorandum identifies three TPP arrangements: §3504 agents, non-certified professional employer organizations (PEOs), and certified professional employer organizations (CPEOs.) In all of these arrangements, the memorandum concludes that they are liable for any underpayment related to an improperly claimed ERC that the TPP claimed on its employment tax return filed under the TPP’s EIN.
Miscellaneous
- IR-2024-47 announces interest rates related to tax overpayments and underpayments will remain the same for the second quarter of 2024. The rate will hold at 8% per year—compounded daily—for individuals, 7% for corporations, 5.5% for corporate overpayments exceeding $10,000, and 10% for large corporate underpayments.
- IR-2024-46 alerts taxpayers to an initiative to begin dozens of audits on business aircraft. The audits will focus on proper allocation between business and personal use by large corporations, large partnerships, and high-income taxpayers. The notice gives credit to additional funding from the Inflation Reduction Act, allowing close scrutinization of an area of tax law that the IRS hasn’t had the resources to pursue for some time.
- The Financial Crimes Enforcement Network (FinCEN) has produced a guide for small entities on accessing beneficial ownership information being collected by the organization since January 1, 2024.
- IR-2024-43 reminds farmers and fishers who did not make estimated tax payments by January 16, 2024 must file their income tax returns and pay all taxes by March 1, 2024 to avoid estimated tax penalties. Those who made estimated tax payments can file by the regular April 15, 2024 date and still avoid estimated tax penalties.
- The Pension Benefit Guaranty Corporation (PBGC) has released the variable rate premium for payment years beginning in February 2024.
- The United States, Austria, France, Italy, Spain, and the United Kingdom released a joint statement extending their initial October 2021 compromise regarding implementation of Pillar 1 digital service taxes, which the U.S. believes unfairly targets U.S. companies. The extension to June 30, 2024 was required as the original period ended December 31, 2023. Under the compromise, the European countries will provide digital service tax credits to U.S. companies in exchange for the withdrawal of retaliatory tariffs on U.S. imports.
Continued Coverage of the Inflation Reduction Act (IRA)
- Proposed regulation REG-132569-17 regarding §48 energy credits has been corrected. The correction is made to clarify that gas upgrading equipment that is necessary to concentrate the gas from qualified biogas property into the appropriate mixture for injection into a pipeline through removal of other gases would be energy property if it is an integral part of an energy property.
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.