The IRS has corrected Notice 2019-20, which provided a waiver of penalties under Code Secs. 6722(failure to furnish correct payee statements) and 6698 (failure to file partnership return) for certain partnerships that file and furnish Schedules K-1 to Form 1065 without reporting negative tax basis capital account information. The updated Notice extends the penalty waiver to Code Secs. 6038(b)and (c) and any other section of the Code, for partnerships that fail to file and furnish Schedules K-1 or any other form or statement to Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, for any penalty that arises solely as a result of failing to include negative tax basis capital account information.

The IRS has corrected Notice 2019-20, which provided a waiver of penalties under Code Secs. 6722(failure to furnish correct payee statements) and 6698 (failure to file partnership return) for certain partnerships that file and furnish Schedules K-1 to Form 1065 without reporting negative tax basis capital account information. The updated Notice extends the penalty waiver to Code Secs. 6038(b)and (c) and any other section of the Code, for partnerships that fail to file and furnish Schedules K-1 or any other form or statement to Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, for any penalty that arises solely as a result of failing to include negative tax basis capital account information.

The penalty relief applies only for tax years beginning after December 31, 2017, but before January 1, 2019.

The IRS will waive the penalty only if both of the following conditions are met:

• the partner Schedules K-1 are timely filed (including extensions) with the IRS, timely furnished to the partners, and contain all other required information; and
• the person or partnership required to file the Schedule K-1 or other applicable form or statement files with the IRS, no later than one year after the original, unextended due date of the form to which the Schedule K-1 or other applicable form or statement must be attached, a schedule setting forth the information listed below for each partner for which negative tax basis capital account information is required.

The required schedule must state:

1. the partnership’s name and Employee Identification Number, if any, and Reference ID Number, if any;
2. the partner’s name, address, and taxpayer identification number; and
3. the amount of the partner’s tax basis capital account at the beginning and end of the tax year at issue.

The schedule should be captioned "Filed Under Notice 2019-20" and should accord with instructions and additional guidance provided by the IRS. The schedule should be sent to: 1973 North Rulon White Blvd., Ogden, UT 84404-7843, MS 4700, Attn: Ogden PTE.

The upper-tier controlled foreign corporation (CFC) partners of a domestic partnership were required to include in gross income their distributive share of income inclusions under subpart F from lower-tier CFCs, and increase earnings and profits (E&P) by the same amount. Regulations under Code Sec. 964provided preliminary steps for conforming a foreign corporation’s profit and loss statement to that of a domestic corporation. The general rules of Code Sec. 312 that governed earnings and profits computations of domestic corporations then applied.

The upper-tier controlled foreign corporation (CFC) partners of a domestic partnership were required to include in gross income their distributive share of income inclusions under subpart F from lower-tier CFCs, and increase earnings and profits (E&P) by the same amount. Regulations under Code Sec. 964provided preliminary steps for conforming a foreign corporation’s profit and loss statement to that of a domestic corporation. The general rules of Code Sec. 312 that governed earnings and profits computations of domestic corporations then applied.

Interaction Between 964 and 312

The rules in Code Sec. 964(a) provide that, with an exception for a depreciation rule in Code Sec. 312(k)(4), the earnings and profits of a foreign corporation are computed according to rules substantially similar to those that apply to domestic corporations, under regulations prescribed by the Secretary. The Tax Court found that regulations reasonably could be read to include regulations under Code Sec. 312.

The Code Sec. 964 regulations required the following steps be taken before the Code Sec. 312 rules could be applied:

• preparation of a profit and loss statement;
• U.S. accounting adjustments; and
• tax adjustments.

The general rules of subpart F and Code Sec. 312applied because there were no specific rules covering the treatment of a CFC’s distributive share of partnership income, or subpart F income inclusions, specifically. Subpart F required upper-tier CFC partners to compute gross income as if they were domestic corporations. As partners in a domestic partnership, they were required to include their distributive shares of the partnership’s income, including subpart F income inclusions, from lower-tier foreign corporations.

Under the Code Sec. 312 regulations, E&P is determined by taking into account all items includible in gross income under Code Sec. 61. Because the inclusions under subpart F were included in gross income, E&P was increased by those amounts.

Dissenting Opinion

A dissenting opinion disagreed with the Tax Court’s conclusion that Code Sec. 964 incorporated the rules of Code Sec. 312 based on the reference to the depreciation rule. The dissent also disagreed with the Tax Court’s statement that Code Sec. 964 provided that the same general rules apply to E&P computations for domestic and foreign corporations because the statute referred to rules "substantially similar" to those applicable to domestic corporations.

The IRS has issued proposed regulations on the information reporting requirements under Code Secs. 101(a)(3) and 6050Y, added by the Tax Cuts and Jobs Act ( P.L. 115-97). The regulations are to apply to reportable life insurance policy sales made, and reportable death benefits paid, after December 31, 2017. Transition relief applies until these regulations are finalized.

The IRS has issued proposed regulations on the information reporting requirements under Code Secs. 101(a)(3) and 6050Y, added by the Tax Cuts and Jobs Act ( P.L. 115-97). The regulations are to apply to reportable life insurance policy sales made, and reportable death benefits paid, after December 31, 2017. Transition relief applies until these regulations are finalized.

Reportable Sales and Payments

New reporting requirements apply to reportable policy sales and payments of reportable death benefits occurring after December 31, 2017.

New Code Sec. 6050Y imposes information reporting obligations related to certain life insurance contract transactions, including reportable policy sales and payments of reportable death benefits. The proposed regulations specify how and when the information reporting obligations must be satisfied. They also provide definitions and rules governing the application of the information reporting obligations.

New Code Sec. 101(a)(3) defines "reportable policy sale" and provides rules for determining the amount of death benefits excluded from gross income following a reportable policy sale. The proposed regulations provide definitions and guidance for determining the amount of death benefits excluded.

Proposed Regulations

The proposed regulations respond to comments generated by the IRS’s pre-regulatory guidance in Notice 2018-41, I.R.B. 2018-20, 584, and provide clarifications.

Payments. The proposed regulations clarify that a reportable policy sale payment includes any amount of the recipient’s debt assumed by the acquirer in addition to cash and the fair market value of property. They also clarify that when an acquirer makes installments payments in more than one year, the acquirer reports the total amount of all payments in the year of the policy sale. The Treasury Department and the IRS are considering whether reportable policy sale payments should be defined to exclude payments of any ancillary costs and expenses. Comments are requested regarding the types of payments made by acquirers in reportable policy sales, the recipients of those payments, and existing reporting requirements applicable to those payments.

Reportable death benefits. Reporting requirements apply to any person that makes a payment of reportable death benefits during any tax year. The proposed regulations clarify that the amounts must be attributable to an interest in the life insurance contract that was transferred in a reportable policy sale. For instance, if the original policyholder of a life insurance contract transfers a 50 percent interest in the life insurance contract in a reportable policy sale, amounts paid due to the death of the insured that are attributable to the 50 percent interest retained by the original policyholder are not reportable death benefits.

Comments are requested as to whether reportable death benefits payment recipients should include, in addition to any person that receives reportable death benefits as a beneficiary under the life insurance contract, any person that receives reportable death benefits as the holder of an interest in the life insurance contract.

Payor. The proposed regulations define "payor" to mean any person making a payment of reportable death benefits, and "reportable death benefits payment recipient" to mean any person that receives reportable death benefits as a beneficiary under the life insurance contract or as the holder of an interest in the life insurance contract. However, comments are sought on whether "payor" should be defined the same as "issue," or should also include any holder of an interest in a life insurance contract that receives reportable death benefits attributable to that interest and is contractually obligated to pay part or all of the proceeds to the beneficial owner of the interest.

Unified reporting. The proposed regulations allow for unified reporting by the acquirers in a series of prearranged transfers of any interest in a life insurance contract. A series of prearranged transfers of an interest in a life insurance contract may include transfers in which one or more persons serve as intermediaries. Such intermediaries may acquire title or possession of an interest in a life insurance contract for state law purposes as nominee on behalf of another person or persons.

Deadlines. The proposed regulations provide that an acquirer must furnish any written statement required to be provided to a reportable policy sale payment recipient no later than February 15 of the year following the calendar year in which the reportable policy sale occurs. The proposed regulations adopt this deadline because a person may be both a reportable policy sale payment recipient and a seller regarding a reportable policy sale, and the deadline for an acquirer to furnish a written statement to a reportable policy sale payment recipient coordinates with the deadline for an issuer that receives a reportable policy sale statement (RPSS) to furnish a written statement to a seller. An acquirer must furnish an RPSS to the issuer by the later of (1) 20 days after the reportable policy sale, or (2) 5 days after the end of the applicable state law rescission period. However, if the later date is after January 15 of the year following the calendar year in which the reportable policy sale occurred, the RPSS must be furnished by January 15 of the year following the calendar year in which the reportable policy sale occurred.

A payor of reportable death benefits must furnish any written statement required to be provided to a reportable death benefits payment recipient no later than January 31 of the year following the calendar year in which the reportable policy sale occurs. The proposed regulations use January 31 because it is generally the deadline for furnishing copies of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to recipients.

Forms 1099-LS and 1099-SB. The proposed regulations provide guidance to sellers of life insurance contracts in reporting gain. IRS Form 1099-LS, Reportable Life Insurance Sales, and Form 1099-SB, Seller’s Investment in Life Insurance Contract, provide specific instructions on these reporting requirements. The proposed regulations also provide guidance to payors of reportable death benefits (reportable on Form 1099-R) and how to calculate the amount of death benefits excluded from gross income.

Transition Relief

Transition relief applies for reportable policy sales and payments of reportable death benefits occurring after December 31, 2017, and before the date final regulations are published in the Federal Register.

For reportable policy sales,

• statements required to be furnished to issuers under Code Sec. 6050Y(a)(2) must be furnished by the later of the applicable deadline in the final regulations or 60 days after the date final regulations are published in the Federal Register;
• returns required to be filed under Code Sec. 6050Y(a)(1) and (b)(1) and statements required to be furnished to payment recipients and sellers under Code Sec. 6050Y(a)(2) and (b)(2)must be filed or furnished by the later of the applicable deadline in the final regulations or 90 days after the date final regulations are published in the Federal Register;

For payments of reportable death benefits, returns required to be filed under Code Sec. 6050Y(c)(1) and statements required to be furnished to payment recipients under Code Sec. 6050Y(c)(2) must be filed or furnished by the later of the applicable deadline in the final regulations or 90 days after the date final regulations are published in the Federal Register.

Comments. The IRS is seeking comments on a range of issues connected with these proposed regulations. Written or electronic comments must be received by May 9, 2019. A public hearing has been scheduled for June 5, 2019, at 10:00 a.m., in the IRS Auditorium, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 15 minutes before the hearing starts. For more information about having your name placed on the building access list to attend the hearing, see the "FOR FURTHER INFORMATION CONTACT" section of the preamble.

Nina E. Olson, the National Taxpayer Advocate (NTA), has announced her decision to retire this summer from the esteemed NTA position at the IRS. Olson has served as taxpayers’ "voice" within the IRS and before Congress for the last 18 years.

Nina E. Olson, the National Taxpayer Advocate (NTA), has announced her decision to retire this summer from the esteemed NTA position at the IRS. Olson has served as taxpayers’ "voice" within the IRS and before Congress for the last 18 years.

Olson will retire from the position of NTA on July 31, 2019, according to a recent NTA Blog post. "I am making the announcement now because I want to prepare the Taxpayer Advocate Service for a smooth transition, and I want to participate in the selection of my successor," Olson wrote.

Critical and Priority Items Lists

Olson outlined the following "critical items" she wants to accomplish before retiring:

• publish new IRM chapters on Taxpayer Assistance Orders and Taxpayer Advocate Directives;
• finalize a regulation governing the operations of Low Income Taxpayer Clinics (LITC); and
• regain the ability to hire attorney-advisors.

Additionally, Olson has created a list of "priority items" for the IRS, which IRS Commissioner Charles Rettig requested. The list includes:

• developing an automated economic hardship risk indicator;
• developing mandatory employee training on the Taxpayer Bill of Rights;
• developing guidance and training on the identification and public disclosure of Program Manager Technical Advice (PMTA) memoranda; and
• designing rights-based notices of deficiency, collection due process hearing notices, and math error notices.

"Underlying all my actions and plans as the National Taxpayer Advocate has been a recognition that the Taxpayer Advocate Service is more than an organization – however independent – within a bureaucratic federal agency," Olson wrote. "The Taxpayer Advocate Service is a concept – an idea. It represents the proposition that taxpayers have rights and protections before the awesome taxation powers of the United States."

One planning thought if your do not get the full impact of your Charitable donations is to setup a Donor-Advised Fund. A donor-advised fund is like a charitable investment account, for the sole purpose of supporting charitable organizations you care about. 

On December 22, the President signed into law the Tax Cuts and Jobs Act of 2017 (TCJA). Personal Exemptions have been eliminated and replaced with higher standard deductions for individuals and married couples. State and Local Taxes (SALT) for state income tax, property taxes have been limited to $10,000 for 2018.  The Standard Deduction will increase from $6,350 per person in 2017 to $12,000 per person in 2018. All persons over age 65 will also be permitted an additional $1,300 increase in their Standard Deduction.    

In 2018, married couple without a mortgage and regular medical expenses, that makes less than $14,000 in charitable contributions will not get any tax benefit for their donations, ($24,000 standard deduction, less $10,000 for state and local income taxes equal $14,000 maximum charitable contributions without tax benefit).

One planning thought if your do not get the full impact of your Charitable donations is to setup a Donor-Advised Fund. A donor-advised fund is like a charitable investment account, for the sole purpose of supporting charitable organizations you care about. When you contribute cash, securities or other assets to a donor-advised fund, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth and you can recommend grants to virtually any IRS-qualified public charity.

Various brokerage firms sponsor donor-advised funds, such as Fidelity Investments, Charles Schwab and Merrill Lynch.  Each firm have different requirements for minimum contributions, fees and minimum grants amounts to charities. 

Let’s say you typically donate $5,000 per year.  You could fund the next four years by donating $20,000 of appreciated stock to the fund.  You are best to donate the stock with the largest gain.  You pay no tax on the gain but get full deduction of the $20,000 fair market value in the year of donation.  The fund will sell your stock but provide you an opportunity to invest that amount within the fund to grow tax deferred.  You can than direct the fund to send money to charities of your choice with no minimum grant requirement.  You can designate an heir to continue to send donations from your fund should you not complete all your donations.  Once contributed to the fund, you can never get the funds returned.

Donation of appreciated securities usually makes the most sense.  Let’s say you donate $20,000 stock with a cost of $10,000.  If you sold those stock to make the donation you could owe $3,380 (Federal Capital Gain rate of 23.8% and California of 10%) in taxes leaving a net of $16,620 to charities.  If you donated appreciated securities, you could grant the full $20,000 to charities.  Keep in mind that in both cases, you would get a tax deduction up to 47% of the donation, (Federal maximum tax rate of 37% and California of 10%).

One further advantage of a donor-advised fund is that the record keeping requirement for individual donations is eliminated, since the fund will keep track of the donations.

If this is too complicated, many charities will also accept the direct donation of securities providing the same tax benefits.

Congress passed the most significant tax reform bill in thirty years, “The Tax Cuts and Jobs Act”. One of the more complex areas is the new deduction for “qualified business income” – often referred to as QBI.  You may hear this talked about as the “New 20% Pass-Through Tax Deduction” or the “Section 199A Deduction”. 

In December 2017, Congress passed the most significant tax reform bill in thirty years, “The Tax Cuts and Jobs Act”. One of the more complex areas is the new deduction for “qualified business income” – often referred to as QBI.  You may hear this talked about as the “New 20% Pass-Through Tax Deduction” or the “Section 199A Deduction”.  Regular “C” corporations do not qualify for this deduction; however, starting in 2018 they do qualify for a low 21% corporate tax rate.

The pass-through deduction is a deduction you may take on your Form 1040 even if you do not itemize. There will be a line to list it on the second page of our Form 1040. It is not an “above the line” deduction on the first page of Form 1040 that reduces your adjusted gross income (AGI). Moreover, the deduction only reduces income taxes, not Social Security or Medicare taxes

This new provision should provide a substantial tax benefit to individuals with qualified business income from a partnership, S corporation, LLC, or sole proprietorship. For tax purposes, what distinguishes these types of businesses is that the business pays no income taxes themselves. Instead, the profits (or losses) from such businesses are passed through the business to the owners whom pay tax on the money on their individual tax returns at their individual tax rates.

QBI is the net income (profit) your pass-through business earns during the year. You determine this by subtracting all your regular business deductions from your total business income. QBI includes rental income so long as your rental activity qualifies as a business. It also includes income from publicly traded partnerships, real estate investment trusts (REITs), and qualified cooperatives. QBI does not include:

• short-term or long-term capital gain or loss—for example, a landlord would not include capital gain earned from selling a rental property
• dividend income
• interest income
• wages paid to S corporation shareholders
• guaranteed payments to partners in partnerships or LLC members, or
• business income earned outside the United States.

QBI is determined separately for each separate business you own. If one or more of your businesses lose money, you deduct (net) the loss from the QBI from your profitable businesses. If you have a qualified business loss—that is, your net QBI is zero or less--you get no pass-through deduction for the year. Any loss is carried forward to the next year and is deducted against your QBI for that year. This serves as a penalty for having a money-losing business.

To determine your pass-through deduction, you must first figure your total taxable income for the year (not counting the pass-through deduction). This is your total taxable income from all sources (business, investment, and job income) minus deductions, including the standard deduction ($12,000 for singles and $24,000 for marrieds filing jointly in 2018). You must have positive taxable income to take the pass-through deduction.

Moreover, the deduction can never exceed 20% of your taxable income.

Rules are in place to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction. These rules involve “thresholds.” This means that you might be ineligible for the deduction if you have a business that is classified as a specified service trade or business, SSTB. What is a specified service trade or business?  These are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services. There is a final catchall category that includes any business where the principal asset is the reputation or skill of one or more of its owners or employees. This likely includes many individuals who provide services not listed above. However, all the details have yet to be worked out by the IRS. Architecture and engineering services are expressly not included in the list of personal services. So, spas and health clubs are in, medical services provided by high income physicians, nurses, dentists etc. are out.  High income attorneys, accountants, actuaries, financial advisors, mortgage brokers, realtors, actors, musicians etc. are out, but promoters, broadcasters, engineers and architects are in.

Starting in 2018, taxpayers with qualified business income (including rental income), may be eligible to take a tax deduction up to 20% of their QBI.  Determining whether you will be eligible to capture the full 20% deduction will be based on your total taxable income for year.    The taxable income thresholds are as follows:

Single filers:                   $157,500 (SSBT with phase-outs at $207,500)

Married filing joint:         $315,000 (SSBT with phase-outs at $415,000)

If your business is one of the Specified Service Trade or Services above these thresholds, you may not qualify for the deduction. The SSBT phased-out is 2% for every $1,000 your income exceeds the $157,500, or 1% for every $1,000 your income exceeds the $315,000 threshold.

If you exceed the income thresholds, your deduction is the lesser of: 

1. 20% of QBI
2. The greater of:

50% of W-2 wages paid to employees

25% of W-2 wages paid to employees PLUS 2.5% of the unadjusted asset basis

The business property must be depreciable long-term property used in the production of income—for example, the real property or equipment used in the business (not inventory). The cost is its unadjusted basis—the original acquisition cost, minus cost of land, if any. The 2.5% deduction can be taken during the entire deprecation period for the property. For use in this property calculation, the period of use starts on the date the property is places in service and ends on the LATER 10 years or the last day of the asset regular depreciation period.

If you have neither employees nor depreciable property, you get no deduction if your income is over the thresholds. This is intended to encourage pass-through owners to hire employees and/or buy property for their business.

Fancy footwork may seem the way to go when dealing with the new tax rules, but the old reliable methods of reducing income have a better chance having stood the test of time. Lowering your income if you are already below the phaseout has less benefit than in the past as business deductions are technically only worth 80 cents on the dollar. (You get a 20% deduction anyway if you don’t invest in the expense.) The phase out is where things really get interesting. If you’re reasonably close to the phase out threshold, a modest amount of planning could make the difference between the full QBI deduction and no deduction at all.

Some Simple Examples:

Mark is married and files jointly. He earned $345,000 in taxable income this year. His sole proprietorship consulting business earned $345,000 and paid $100,000 to employees. Consulting is one of service provider categories SSTB, so his pass-through deduction is subject to the phase-out. His $345,000 taxable income is $30,000, or 30% ($30,000/$1,000,000), over the $315,000 threshold. Before the phase-out, his deduction is limited to 50% of the W2 wages he paid, which was $50,000 (50% x $100,000 W2 wages = $50,000). Since, his phase-out percentage is 30%, he gets 70% of the full deduction, or $35,000 (70% x $50,000 = $35,000). If his taxable income was over $415,000, there would be no QBI deduction.

Jim and Sue are married and file jointly. Their taxable income this year is $500,000, including $400,000 in QBI they earned from their bar business they own through an LLC. They employed four bartenders during the year to whom they paid $150,000 in W2 wages. They own their bar building. They bought it four years ago for $600,000 and the land is worth $100,000, so its unadjusted acquisition basis is $500,000. Their maximum possible pass-through deduction is 20% of their $400,000 QBI, which equals $80,000. However, since their taxable income was over $415,000, their pass-through deduction is limited to the greater of (1) 50% of the W2 wages they paid their employees, or (2) 25% of W2 wages plus 2.5% of their bar building’s $500,000 basis. (1) is $75,000 (50% x $150,000 = $75,000; (2) is $50,000 (2.5% x $500,000) + (25% x $150,000) = $50,000. (1) is greater so their pass-through deduction is $75,000.

Alice, a single taxpayer, owns a 5-unit apartment building. She earned $250,000 in QBI income and total taxable income during 2018, well over the $207,500 threshold for singles. She has no employees in her rental business. Thus, her pass-through deduction is limited to 2.5% of the unadjusted basis of the long-term property she uses in her rental business. This consists of her building, which she purchased five years ago. Her unadjusted basis in the building (purchase price minus value of the land) is $500,000. Her pass-through deduction is 2.5% x $500,000 = $12,500.