On December 20, President Donald Trump signed the bipartisan, year-end government spending and tax package, just hours before federal funding was set to expire. Trump's signature on the over 2,000-page spending package avoided a government shutdown.

On December 20, President Donald Trump signed the bipartisan, year-end government spending and tax package, just hours before federal funding was set to expire. Trump's signature on the over 2,000-page spending package avoided a government shutdown.

Year-End Tax Package
The Further Consolidated Appropriations Act, 2020, (HR 1865), logs just over 700 pages and serves as only half of the government spending package for fiscal year 2020, which runs through September 30. Most notably, HR 1865 serves as the legislative vehicle for a year-end tax package, which carries a costly $426 billion price tag over a 10-year budget window, according to the nonpartisan Joint Committee on Taxation (JCT), JCX-54R-19.

Some of the tax-related provisions in the year-end package include, among other items:

• Retroactive and current renewal of over two dozen temporary tax breaks known as tax extenders, which have expired or would soon be expired, spanning from 2017 to 2019. Generally, the renewed tax breaks are extended through 2020, and the biodiesel and short-line railroad maintenance tax credits are extended until 2022;
• The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) (HR 1994), which makes sweeping changes to retirement savings and employer retirement contributions provisions;
• Certain fixes to the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97); and
• Full repeal of three tax-related provisions of the Affordable Care Act (ACA) ( P.L. 111-148), two of which include the 2.3 percent excise tax on medical devices and the 40 percent excise "Cadillac" tax on high-dollar employer-sponsored health insurance plans.

The House approved HR 1865 on December 17 by a 297-to-120 vote. The Senate cleared the measure on December 19 by a 71-to-23 vote.

"So in the end, with more than $400 billion in tax cuts, there were lots of winners and the usual loser – the budget."

"There were numerous fits and starts, but this result is a reminder that Congressional muscle memory on extenders is very strong, so ultimately the members did what they always do – extend them," John Gimigliano, principal-in-charge of the federal legislative and regulatory services group in the Washington National Tax practice of KPMG LLP told Wolters Kluwer. "Some might be surprised to see the ACA taxes rolled back, but it has always felt like those items were on borrowed time; it was really just a question of when and how they were repealed, not whether. So in the end, with more than $400 billion in tax cuts, there were lots of winners and the usual loser – the budget."

SECURE ACT
The bipartisan SECURE Act, which cleared the House in May but remained stalled in the Senate most of the year, makes a number of major as well as administrative changes for retirement savings affecting both individuals and employers.

Some of those changes are noted as follows:

IRA Changes

• Moving the start date for requirement required minimum distributions (RMDs) to the year the owner turns 72;
• Ending the 70 1/2 age limit for contribute contributions to an IRA; and
• Shortening the distribution period for nonspouse inherited IRAs to a 10-year maximum.
  The 10-year window for distributions to a nonspouse beneficiary applies regardless of when the IRA owner dies. Thus, the change will severely limit the use of "stretch IRAs" as an effective planning tool. Limited exceptions are available.

401(k) Changes

• Requiring plans to offer participation to long-term, part-time employees;
• Encouraging auto-enrollment by increasing the cap; and
• Streamlining the safe harbor for non-elective contributions.

Employers with 401(k) plans must offer employees who work between 500 and 1000 hours year an additional means to participate in the plan. The rule change would only affect 401(k) cash or deferral arrangements, and no other qualified plans.

Retirement Plans for Small Employers

Several changes are made to encourage more small employers to offer retirement benefits to their employees, such as:

• Adding a new tax credit for small employers using auto-enrollment plans;
• Increasing the credit for small employer pension plan start-up costs; and
• Allow small employers of two or more to band together to participate in a new class of pooled multiple employer plans (MEPs).

Congress Adjourns Until 2020
After an eventful two-week sprint to the finish line, Congress adjourned for the year on December 20. Lawmakers are expected to return to Washington, D.C. during the week of January 6, 2020.

The Fifth Circuit U.S. Court of Appeals ruled that the Patient Protection and Affordable Care Act’s (ACA) ( P.L. 111-148) individual mandate is unconstitutional because it can no longer be read as a tax, and there is no other constitutional provision that justifies this exercise of congressional power. However, the central question of whether the rest of the ACA remains valid after Congress removed the penalty for not having health insurance remained unanswered. Instead, the case was sent back to the district court to reconsider how much of the ACA could survive without the individual mandate penalty.

The Fifth Circuit U.S. Court of Appeals ruled that the Patient Protection and Affordable Care Act’s (ACA) ( P.L. 111-148) individual mandate is unconstitutional because it can no longer be read as a tax, and there is no other constitutional provision that justifies this exercise of congressional power. However, the central question of whether the rest of the ACA remains valid after Congress removed the penalty for not having health insurance remained unanswered. Instead, the case was sent back to the district court to reconsider how much of the ACA could survive without the individual mandate penalty.

District Court
According to the opinion, "the rule of law demands a careful, precise explanation of whether the provisions of the ACA are affected by the unconstitutionality of the individual mandate as it exists today." Therefore, the opinion directs the district court to carefully consider whether the mandate can be legally distinct from the rest of the law. The opinion instructs the district court to answer two questions: Which parts of the ACA "are indeed inseverable" now that the mandate is no longer enforced and whether a ruling in the case should apply only to the Republican-led states that sued to overturn the law, an issue raised by Trump administration lawyers.

Dissenting Opinion
A dissenting opinion discussed that Congress made it clear that it wanted the rest of the ACA to stand and sending the case back to the lower court was criticized. The opinion also highlighted that sending the case back to the lower court merely identifies serious flaws in the district court’s analysis and remands for a do-over, which will unnecessarily prolong this litigation and the concomitant uncertainty over the future of the health care sector.

Proposed qualified opportunity zone regulations issued on October 29, 2018 ( REG-115420-18) and May 1, 2019 ( REG-120186-18) under Code Sec. 1400Z-2 have been finalized with modifications. The regulations. which were issued in a 550 page document, are comprehensive.

Proposed qualified opportunity zone regulations issued on October 29, 2018 ( REG-115420-18) and May 1, 2019 ( REG-120186-18) under Code Sec. 1400Z-2 have been finalized with modifications. The regulations. which were issued in a 550 page document, are comprehensive.

The regulations address issued related to all aspects of the gain deferral rules and also various requirements that must be met for an entity to qualify as a qualified opportunity fund (QOF) or as a qualified opportunity zone business. Duplicative rules regarding QOFs and qualified opportunity zone businesses have been combined and definitions of key terms added. The regulations detail which taxpayers are eligible to make the election, the types of capital gains eligible for deferral, and the method of making deferral elections. Revisions are made to the rules applying the statutory 180-period and other requirements with regard to the making of a qualifying investment in a QOF.

The IRS will reflect these regulations in updated forms, instructions, and other guidance in January 2020.

Benefits of QOF Investments
Taxpayers may elect to temporarily defer capital gain in income if the gain is invested within 180 days in a QOF. The gain is recognized on Dec. 31, 2026, or if earlier, upon the occurrence of an inclusion event such as the sale of the QOF investment. However, 10 percent of the deferred gain is not recognized if the investment is held five years and 15 percent is not recognized after seven years. In addition, taxpayers may exclude recognition of gain on appreciation in the investment if the investment in the qualified opportunity fund is held for at least 10 years.

Section 1231 gains
The final regulations provide that eligible gains include the gross amount of eligible section 1231 gains unreduced by section 1231 losses regardless of character. The proposed regulations took a "netting" approach. The 180-day period for an eligible taxpayer to invest an amount with respect to an eligible section 1231 gain begins on the date of the sale of the section 1231 asset rather than at the end of the tax year.

RICS and REITS
The 180-day period for RIC or REIT capital gain dividends generally begins at the close of the shareholder’s tax year in which the capital gain dividend would otherwise be recognized by the shareholder. To ensure that RIC and REIT shareholders do not have to wait until the close of their tax year to invest capital gain dividends received during the tax year, the final regulations also provide that shareholders may elect to begin the 180-day period on the day each capital gain dividend is paid. The 180-day period for undistributed capital gain dividends, however, begins on either the last day of the shareholder’s tax year in which the dividend would otherwise be recognized or the last day of the RIC or REIT’s tax year, at the shareholder’s election.

The aggregate amount of a shareholder’s eligible gain with respect to capital gain dividends received from a RIC or a REIT cannot exceed the aggregate amount of capital gain dividends that the shareholder receives as reported or designated by that RIC or that REIT for the shareholder’s tax year.

Installment Sales
The final regulations allow an eligible taxpayer to elect to choose the 180- day period to begin on either (i) the date a payment under an installment sale is received for that tax year, or (ii) the last day of the tax year the eligible gain under the installment method would be recognized. Therefore, if the taxpayer defers gain from multiple payments under an installment sale, there might be multiple 180-day periods, or a single 180-day period at the end of the taxpayer’s tax year, depending upon taxpayer’s election.

Partners, S Corporation Shareholders, and Trust Beneficiaries
The final regulations provide partners, S shareholders, and beneficiaries of decedents’ estates and non-grantor trusts with the option to treat the 180-day period as commencing upon the due date of the related entity’s tax return, not including any extensions. This rule does not apply to grantor trusts.

Gain from Disposal of Partial Interest in QOF Investment
Gain arising from an inclusion event is eligible for deferral even though the taxpayer retains a portion of its qualifying investment after the inclusion event. If an inclusion event relates only to a portion of a taxpayer’s qualifying investment in the QOF, (i) the deferred gain that otherwise would be required to be included in income (inclusion gain amount) may be invested in a different QOF, and (ii) the taxpayer may make a deferral election with respect to the inclusion gain amount, so long as the taxpayer satisfies all requirements for a deferral election on the inclusion gain amount.

Post-December 31, 2026 Gain Ineligible
Gain arising after December 31, 2026 (including gain mandatorily recognized on that date) is not eligible for deferral.

Death Related Transfers of QOF Investments
A qualifying investment received by a beneficiary in a transfer by reason of death remains a qualifying investment in the hands of the beneficiary.

Acquisition of Eligible Interest from Person Other than a QOF
A taxpayer may make a deferral election for an eligible interest acquired from a person other than a QOF. The final regulations do not require the transferor to have made a prior deferral election for the acquirer of an eligible interest to make the election.

Further, for interests in entities that existed before the enactment of the deferral provision, if such entities become QOFs, then the interests in those entities, even though not qualifying investments in the hands of a transferor, are eligible interests that may (i) be acquired by an investor and (ii) result in a qualifying investment of the acquirer if the acquirer has eligible gain and the acquisition was during the 180-day period with respect to that gain.

Built in Gains
Built-in gain of a REIT, a RIC, or an S corporation potentially subject to corporate-level tax is eligible for deferral. If the deferral election is made, the amount of gain is not included in the calculation of the entity’s net recognized built-in gain.

Identification of Disposed Interests in a QOF
The final regulations permit taxpayers to specifically identify QOF stock that is sold or otherwise disposed. If a taxpayer fails to adequately identify which QOF shares are disposed of, then the FIFO identification method applies. If, after application of the FIFO method, a taxpayer is treated as having disposed of less than all of its investment interests that the taxpayer acquired on one day and the investments vary in its characteristics, then a pro-rata method applies to the remainder.

The specific identification method does not apply to the disposition of interests in a QOF partnership.

Deferred Gain Retains Tax Attributes
The final regulations make it clear that if a taxpayer is required to include in income some or all of a previously deferred gain, the gain so included has the same attributes that the gain would have had if the recognition of gain had not been deferred. If a deferred gain cannot be clearly associated with an investment in a particular QOF, an ordering rule applies to make this determination.

Effective Date
The final regulations are generally applicable to tax years beginning after 60 days after publication in the Federal Register.

With respect to the portion of a taxpayer’s first tax year ending after December 21, 2017, that began on December 22, 2017, and for tax years beginning after December 21, 2017, and on or before 60 days after publication in the Federal Register taxpayers may rely on either the proposed regulations or the final regulations but not both.

The IRS has issued final regulations that provide guidance on transfers of appreciated property by U.S. persons to partnerships with foreign partners related to the transferor. Specifically, the regulations override the general nonrecognition rule under Code Sec. 721(a) unless the partnership adopts the remedial allocation method and certain other requirements are satisfied. The regulations affect U.S. partners in domestic or foreign partnerships.

The IRS has issued final regulations that provide guidance on transfers of appreciated property by U.S. persons to partnerships with foreign partners related to the transferor. Specifically, the regulations override the general nonrecognition rule under Code Sec. 721(a) unless the partnership adopts the remedial allocation method and certain other requirements are satisfied. The regulations affect U.S. partners in domestic or foreign partnerships.

Background
Code Sec. 721(a) generally provides that no gain or loss is recognized by either a partnership or any of its partners upon a contribution of property to the partnership in exchange for a partnership interest. In Code Sec. 721(c), the Treasury Secretary has regulatory authority to override this nonrecognition provision for gain realized on the transfer of property to a domestic or foreign partnership if the gain, when recognized, would be includible in the gross income of a person other than a U.S. person.

Under temporary regulations issued in 2017, if a U.S. person contributes certain property with built-in gain to a partnership that has foreign partners related to the transferor, then gain will be recognized unless the gain deferral method is applied with respect to the property ( Temporary Reg. §§1.721(c)-2T; 1.721(c)-3T). Under a de minimis exception, nonrecognition continues to apply if the sum of all built-in gain property contributed to the partnership during the tax year does not exceed $1 million.

The final regulations adopt the temporary regulations with certain modifications.

Related Person Definition
The final regulations modify the definition of related person in certain situations. This modification provides relief when certain foreign individual partners of a partnership would be treated as a related person with respect to a domestic corporation by reason of Code Sec. 267(c)(3).

Consistent Allocation Method
The final regulations add a new sentence in Reg. §1.721(c)-3(c)(1). Upon a variation (as described in Reg. §1.706-4(a)(1)) of a U.S. transferor’s interest in a Code Sec. 721(c) partnership, book items with respect to section 721(c) property that are allocated under the interim closing method (as described in Reg. §1.706-4) will be treated as allocated in the same percentage for applying the consistent allocation method in a single tax year, unless the variation results from a transaction undertaken with a principal purpose of avoiding the tax consequences of the gain deferral method.

Reporting Requirements
The 2017 regulations required much of the reporting to be on statements attached to returns. Since the 2017 regulations were issued, however, the IRS has updated and added new schedules to Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, to facilitate compliance with these reporting requirements. The IRS has also issued new Form 8838-P, Consent To Extend the Time To Assess Tax Pursuant to the Gain Deferral Method (Section 721(c)). The final regulations generally require taxpayers to use these forms and schedules.

The final regulations also clarify the duration for which the U.S. transferor must extend the period of limitations on the assessment of tax under Reg. §1.721(c)-6(b).

Technical Termination Rules
The Tax Cuts and Jobs Act, ( P.L. 115-97) (the "TCJA") eliminated technical terminations. However, the applicability date for these final regulations relates back to the applicability date provided in the 2017 regulations, which is before the effective date provided in the TCJA. Accordingly, the final regulations retain technical termination rules, but their application will be limited. The rules will only apply to technical terminations occurring on or after the applicability date provided in the 2017 regulations but before the effective date for the repeal of Code Sec. 708(b)(1)(B) provided in the TCJA.

Effective Date
The regulations are effective on the date of filing with the Federal Register. For dates of applicability, see Reg. §§1.197-2(l)(5)(i), 1.704-1(f), 1.704-3(g)(1), 1.721(c)-1(e), 1.721(c)-2(e), 1.721(c)-3(e), 1.721(c)-4(d), 1.721(c)-5(g), 1.721(c)-6(g), and 1.6038B-2(j)(4).

The IRS has released Publication 5382, "Internal Revenue Service Progress Update / Fiscal Year 2019—Putting Taxpayers First." This new annual report describes accomplishments across the agency, and highlights the work of IRS employees during the past year. It covers a variety of taxpayer service efforts, including development of the new Taxpayer Withholding Estimator, as well as operations support efforts on areas involving information technology modernization, human capital office initiatives, and others.

The IRS has released Publication 5382, "Internal Revenue Service Progress Update / Fiscal Year 2019—Putting Taxpayers First." This new annual report describes accomplishments across the agency, and highlights the work of IRS employees during the past year. It covers a variety of taxpayer service efforts, including development of the new Taxpayer Withholding Estimator, as well as operations support efforts on areas involving information technology modernization, human capital office initiatives, and others.

"This report is about more than what happened during the past year," IRS Commissioner Chuck Rettig wrote in the report’s opening message to taxpayers. "It’s also designed to provide insight into the people serving this country on behalf of the IRS, and provide a glimpse into the future," he added.

IRS Pub. 5382 also focuses criminal investigation results and efforts involving civil enforcement. Also discussed are ongoing compliance areas, including micro-captives, syndicated conservation easements, and virtual currency. The report further covers the IRS’s implementation of new tax laws, and the IRS’s ongoing work on the new Taxpayer First Act of 2019.

Individual Audits Down
Taxpayers are now half as likely to be audited by the IRS for their individual income tax returns as they were a decade ago. As described in IRS Pub. 5382, the IRS audited 0.45 percent of individual (1040) income tax returns during fiscal year (FY) 2019. This number is down from 1.1 percent of tax returns audited in 2010. The IRS’s ongoing loss to its total workforce is largely to blame for the consistent decline in IRS audits, according to the report.

"The IRS lost more than 29,618 full time positions between FY 2010 and FY 2019, which includes Information Technology, Operations Support, Taxpayer Service and Enforcement personnel. These losses directly correlate with a steady decline in the number of individual audits during the past nine years," the report notes.

Hill Reaction
Although individual audits have significantly decreased, Democratic lawmakers on Capitol Hill are criticizing the fact that the IRS continues to conduct more examinations on lower-income individual taxpayers than it does on higher-income taxpayers or corporations. However, the IRS has said previously that audits on higher-income individuals and businesses are significantly more complex and require more resources.

"IRS audit rates are at their lowest levels in 40 years, allowing the wealthy and well-connected to steal from taxpayers with no consequences," Senate Finance Committee ranking member Ron Wyden, D-Ore., said in a January 7 statement. "The bulk of tax avoidance and fraud comes from corporations, pass-through business and those at the top. Ensuring the wealthy and corporations pay what they owe takes the most resources and manpower, and I’m working with the IRS to get a clear picture on funding and staffing levels needed to audit top earners at 2010 levels," Wyden added.

Currently, the IRS anticipates that up to 31 percent of its workforce (nearly 19,719 full-time employees) will retire within the next five years. The IRS’s workforce decline is expected to create a "significant risk of a large knowledge and experience gap for the nation’s tax agency," according to the IRS report.

Bridget Roberts, the Acting National Taxpayer Advocate, released her 2019 Annual Report to Congress. The report discusses the key challenges facing the IRS regarding the implementation of the Taxpayer First Act, inadequate taxpayer service and limited funding of the agency. Further, Roberts released the third edition of the National Taxpayer Advocate’s "Purple Book," which presents 58 legislative recommendations designed to strengthen taxpayer rights and improve tax administration.

Bridget Roberts, the Acting National Taxpayer Advocate, released her 2019 Annual Report to Congress. The report discusses the key challenges facing the IRS regarding the implementation of the Taxpayer First Act, inadequate taxpayer service and limited funding of the agency. Further, Roberts released the third edition of the National Taxpayer Advocate’s "Purple Book," which presents 58 legislative recommendations designed to strengthen taxpayer rights and improve tax administration.

Taxpayer First Act
The report highlighted that the Taxpayer First Act ( P.L. 116-25) had made the most comprehensive revisions to IRS procedures since the IRS Restructuring and Reform Act of 1998, including some 23 provisions previously recommended by the National Taxpayer Advocate. Further, the Taxpayer First Act also required the IRS to develop four strategic plans:

• a comprehensive taxpayer service strategy (due to Congress by July 1, 2020);
• a comprehensive plan to redesign the IRS’s organizational structure (due to Congress by Sept. 30, 2020);
• a comprehensive employee training strategy that includes taxpayer rights training (due to Congress by July 1, 2020); and
• a multi-year plan to meet IRS information technology (IT) needs.

Key IRS Challenges
The biggest challenge facing the IRS is its struggle to complete its mission. The IRS aims to "provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all." The report emphasizes that the IRS is struggling to meet both of those goals, and attributes the IRS’s shortcomings mostly to budget constraints but also to a culture in which the agency focuses on its own priorities without adequately factoring in the needs of taxpayers.

The report states that the IRS is among the lowest-performing federal agencies in providing a positive customer experience. During fiscal year (FY) 2019, the report said that the IRS received approximately 100 million telephone calls, and customer service representatives answered only 29 percent. The report further states that the IRS has also struggled to enforce the law with "fairness to all". The report urges the IRS to prioritize phone service for taxpayers against whom it takes collection action.

Low Budget
Since 2010, the IRS budget has been reduced by about 20 percent after adjusting for inflation, and the number of full-time equivalent employees has declined by about 22 percent. The report points out that answering 100 million telephone calls, conducting audits, and taking enforcement actions require adequate staffing, and the IRS cannot substantially improve its performance without additional resources. The report urges Congress to increase IRS funding and particularly for taxpayer service and IT modernization, and to change the budget rules to account for the revenue additional IRS appropriations are likely to generate.

Identifying Taxpayer Needs and Preferences
Despite the IRS’s significant funding limitations, the report urges the IRS to utilize the Taxpayer First Act requirements – to develop plans to revamp its taxpayer service strategy, organizational structure, employee training strategy, and technology priorities – as a roadmap for a once-in-a-generation reassessment of its objectives and operations.

While noting that the IRS has developed strategies in a vacuum without soliciting taxpayer feedback and taking into account taxpayer needs and preferences, the report suggests a full-scale cultural shift. The report also expressed concern that the IRS has declined to include the National Taxpayer Advocate or a Taxpayer Advocate Service (TAS) representative as part of a core team created to coordinate its Taxpayer First Act implementation activities.

The report also makes numerous recommendations to improve the customer experience, including that the IRS take the following actions:

• Conduct multi-disciplined, comprehensive research into taxpayer needs and preferences.
• Require that all IRS business units, including those charged primarily with enforcement, develop a detailed customer service strategy.
• Appoint a Chief Customer Experience Officer to coordinate service initiatives across IRS business units.
• Ensure that taxpayers who cannot work with the IRS digitally, or whose issues are not resolved online, can reach and work with an IRS employee.
• Address the needs of practitioners who interact with the IRS on behalf of large numbers of taxpayers.
• For each proposal included in its customer service strategy, include cost estimates, milestones, and taxpayer-focused performance measures so the effectiveness of the strategy in improving customer service can be measured over time.

Other Matters
The report also:

• identified 10 "most serious problems";
• provided status updates on two problems identified in previous reports;
• made dozens of recommendations for administrative change;
• made 58 recommendations for legislative change;
• analyzed the 10 tax issues most frequently litigated in the federal courts; and
• presented four research studies.

The IRS has modified the applicability dates for proposed regulations under Code Sec. 382 that were issued with NPRM REG-125710-18, September 10, 2019 (2019 proposed regulations). The IRS is withdrawing the text of the proposed applicability dates, and proposing revised applicability dates. The newly issued proposed rules would also provide transition relief.

The IRS has modified the applicability dates for proposed regulations under Code Sec. 382 that were issued with NPRM REG-125710-18, September 10, 2019 (2019 proposed regulations). The IRS is withdrawing the text of the proposed applicability dates, and proposing revised applicability dates. The newly issued proposed rules would also provide transition relief.

Proposed Regulations and Notice 2003-65
The 2019 proposed regulations would provide guidance on the inclusion of items of income and deductions in the calculation of built-in gains and losses under Code Sec. 382(h). The proposed regulations would apply to ownership changes that occur after the date the proposed regulations are published as final regulations in the Federal Register.

Notice 2003-65, 2003-2 CB 747, provides interim guidance for identifying built-in gains and losses under Code Sec. 382(h). This notice permits taxpayers to rely on safe harbor approaches for applying Code Sec. 382(h) to an ownership change prior to the effective date of temporary or final regulations issued under that provision.

Delay of Applicability Date
To address concerns raised by taxpayers and practitioners, the IRS has withdrawn the text of Proposed Reg. §1.382-2(b)(4) and Proposed Reg. §1.382-7(g) contained in the 2019 proposed regulations, and replaced it with a revised proposed applicability date text. To avoid any gap between the date on which taxpayers can no longer rely on Notice 2003-65 and the date on which the final regulations are applicable, the applicability date of the final regulations would be 30 days after the date such regulations are published in the Federal Register (delayed applicability date). Exceptions exist for two situations discussed below.

Notice 2003-65 will remain applicable to ownership changes to which the final regulations do not apply.

Limiting Duplicative Application
The first exception to the delayed applicability date relates to the rule in Proposed Reg. §1.382-7(d)(5), which provides that certain carryforwards of business interest expense disallowed under Code Sec. 163(j) would not be treated as recognized built-in losses under Code Sec. 382(h)(6)(B), if such amounts were allowable as deductions during the five-year recognition period set forth in Code Sec. 382(h)(7)(A). This rule eliminates the possible duplicative application of Code Sec. 382 to certain disallowed business interest expense carryforwards.

The IRS has determined that Proposed Reg. §1.382-7(d)(5) should be finalized before the remainder of the rules in the 2019 proposed regulations, and that taxpayers should be allowed to retroactively apply this rule. To that end, the IRS expects that Proposed Reg. §1.382-7(d)(5) will be finalized as part of the Treasury decision that finalizes the proposed Code Sec. 163(j) regulations (see 83 FR 67490), and that taxpayers will be permitted to apply the rule to prior periods. The IRS continues to study the remainder of the rules in the 2019 proposed regulations.

Transition Relief
Under the proposed transition relief provisions, the final regulations would not apply to certain ownership changes that occur after the delayed applicability date. To qualify for the transition relief, the ownership change must occur immediately after an owner shift or equity structure shift that occurs pursuant to:

• a binding agreement in effect on or before the delayed applicability date and at all times thereafter;
• a specific transaction described in a public announcement made on or before the delayed applicability date;
• a specific transaction described in a filing with the Securities and Exchange Commission submitted on or before the delayed applicability date;
• a transaction described in a private letter ruling request submitted to the IRS on or before the delayed applicability date; or
• a court order (or a plan confirmed, or a sale approved, by court order) in a title 11 or similar case, provided that the taxpayer was a debtor in a case before such court on or before the delayed applicability date.

The relevant owner shift or equity structure shift must be a specific, identifiable transaction.

Taxpayers may continue to rely on Notice 2003-65 for to any ownership change qualifying for transition relief, even though the notice will be obsoleted on the delayed applicability date. However, a taxpayer may choose to apply the final regulations to such an ownership change.

The Treasury and IRS have issued final regulations on the due diligence and reporting rules for persons making certain U.S. source payments to foreign persons. Guidance is also provided on reporting by foreign financial institutions on U.S. accounts. The regulations are effective on the date the regulations are published in the Federal Register.

The Treasury and IRS have issued final regulations on the due diligence and reporting rules for persons making certain U.S. source payments to foreign persons. Guidance is also provided on reporting by foreign financial institutions on U.S. accounts. The regulations are effective on the date the regulations are published in the Federal Register.

Obtaining a Foreign TIN and Date of Birth
Temporary regulations provided that beginning January 1, 2017, a beneficial withholding certificate provided to document an account maintained at a U.S. branch or office of a financial institution was required to include a foreign taxpayer identification number (TIN) and the date of birth for an individual, in order to treat the certificate as valid. In response to comments regarding the difficulty of the requirements, the Treasury and IRS issued Notice 2017-46.

The notice provided a one-year delay in the implementation of the requirements for payments made on or after January 1, 2018, and a transitional rules to phase in the foreign TIN requirement for certificates provided before January 1, 2018. The transitional rules allow an otherwise valid certificate to remain valid until January 1, 2020. For payments made after January 1, 2020, a withholding agent may treat a pre-2018 as valid if the foreign TIN is obtained on a written statement or is in the withholding agent’s files. In Notice 2018-20, the IRS stated that it intended to expand its list of jurisdictions that do not issue foreign TINs to their residents to include jurisdictions that requested to be on the list, even if they issue foreign TINs.

The final regulations incorporate the temporary regulations and Notices with minor changes, by:

• providing, with respect to withholding certificates signed on or after January 1, 2018, that a separate written statement is an acceptable way to collect a foreign TIN, if the written statement contains an acknowledgment that the statement is part of the withholding certificate;
• clarifying the exception to the foreign TIN requirement for an account holder that is a government, international organization, foreign central bank or resident of a U.S. territory; and
• clarifying that a withholding agent may rely on the date of birth on a withholding certificate, unless it knows or has reason to know that the date of birth is incorrect.

Nonqualified Intermediaries
A nonqualified intermediary is generally required to provide a withholding agent a Form W-8IMY, a withholding statement, and documentation for each payee for which the intermediary receives a payment. The final regulations clarify that the general standards of knowledge that apply to withholding agents apply to a nonqualified intermediary for reliance on payee documentation, for making the representation that the information on the certificate is not inconsistent with other account information that the nonqualified intermediary has.

A nonqualified intermediary may provide a withholding statement that does not include a chapter 4 recipient code for one or more payees if the withholding agent can determine the appropriate code based on other information included on or associated with the withholding statement, or contained in the withholding agent’s records.

Electronic Signatures
A withholding agent can accept an electronically signed withholding certificate if the certificate reasonably demonstrates to the withholding agent that it has been electronically signed by the recipient identified on the form or authorized by the recipient to sign the form.

The final regulations allow the withholding agent to also consider documentation or other information that the withholding agent has that supports that the withholding certificate was electronically signed, absent actual knowledge that the information or documentation is incorrect.

Additional Changes
The final regulations also make clarifications with respect to withholding certificates and statements furnished through a third party repository.

Regarding the claim of a reduced rate of withholding under a treaty, the final regulations modify the general standard of knowledge by providing that:

• the withholding agent has reason to know that a claim of reduced rate under a treaty is unreliable or incorrect when it can check a list on the IRS website regarding the existence of the treaty, and
• a withholding agent can rely on a beneficial owner’s claim regarding a limitation of benefits (LOB) provision, absent actual knowledge that the claim is unreliable or incorrect.

The final regulation also extend the time for withholding agents to obtain treaty statements, with respect to specific LOB provisions for preexisting accounts, to January 1, 2020.

Taxpayers have been provided with additional guidance for complying with the Code Sec. 871(m) regulations on dividend equivalent payments for 2021, 2022, and 2023. The Treasury Department and the IRS intend to amend the regulations to delay the effective/applicability date of certain rules. Further, the phase-in period provided in Notice 2018-762, I.R.B. 2018-40, 522, has been extended.

Taxpayers have been provided with additional guidance for complying with the Code Sec. 871(m) regulations on dividend equivalent payments for 2021, 2022, and 2023. The Treasury Department and the IRS intend to amend the regulations to delay the effective/applicability date of certain rules. Further, the phase-in period provided in Notice 2018-762, I.R.B. 2018-40, 522, has been extended.

Dividend Equivalent Payments
A dividend equivalent amount is essentially an amount directly or indirectly determined by reference to a U.S. dividend. Code Sec. 871(m) treats dividend equivalent payments as U.S. source dividends. These payments are subject to 30-percent withholding (or a lower treaty rate) if received by a nonresident alien or foreign corporation.

The Code Sec. 871(m) regulations include final and temporary regulations under Code Secs. 871(m), 1441, 1461, and 1473.

Phase-in Year Extended
The effective/applicability date for the specified notional principal contract (NPC) rules under Reg. §1.871-15(d)(2) and the specified equity-linked instrument (ELI) rules under Reg. §1.871-15(e) will be revised. These rules will not apply to any payment made with respect to any non-delta-one transaction issued before January 1, 2023.

The IRS will take into account the extent to which the taxpayer or withholding agent made a good faith effort to comply with the Code Sec. 871(m) regulations in enforcing those regulations—

• for any delta-one transaction in 2017 through 2022; and
• for any non-delta-one transaction that is a Code Sec. 871(m) transaction under Reg. §1.871-15(d)(2) or Reg. §1.871-15(e) in 2023.

Further, the period when the IRS will take into account the extent to which a qualified derivatives dealer made a good faith effort to comply with the Code Sec. 871(m) regulations and the relevant provisions of the 2017 Qualified Intermediary (QI) Agreement is extended through 2022.

The 2017 QI Agreement will be revised so that a QDD will be treated as satisfying the obligations that specifically apply to a QDD under that agreement for 2017 through 2022.

Simplified Standard Extended
The period when the simplified standard applies for withholding agents to determine whether transactions entered into were combined transactions is extended to include 2021 and 2022. Transactions entered into in 2017 through 2022 that are combined under the simplified standard will continue to be treated as combined for future years. They will not stop being combined transactions by applying Reg. §1.871-15(n) (the combined transactions rule in the regulations), or by disposing of less than all of the potential Code Sec. 871(m) transactions that are combined under this rule.

Transactions entered into in 2017 through 2022 that are not combined under the simplified standard will not become combined transactions by applying Reg. §1.871-15(n) to them in future years, unless a reissuance or other event causes the transactions to be retested to determine whether they are Code Sec. 871(m) transactions.

Phase-In Relief for Qualified Derivatives Dealers Extended
Regarding qualified derivatives dealers (QDDs), Reg. §1.871-15(q)(1), Reg. §1.871-15(r)(3), and Reg. §1.1441-1(b)(4)(xxii)(C) will be amended so that a QDD will not be subject to tax on dividends and dividend equivalents received in 2021 and 2022 in its equity derivatives dealer capacity or withholding on those dividends (including deemed dividends). A QDD will have to compute its Code Sec. 871(m) amount using the net delta approach beginning in 2023.

A QDD will remain liable under Code Sec. 881(a)(1) for tax on dividends and dividend equivalents that it receives in any other capacity, and on any other U.S. source FDAP payments that it receives (whether or not in its equity derivatives dealer capacity). A QDD is also responsible for withholding on dividend equivalents it pays to a foreign person on a Code Sec. 871(m) transaction.

Transition Rules Extended
Withholding agents may apply the qualified securities lender (QSL) transition rules described in Notice 2010-46, I.R.B. 2010-24, 757, for payments made in calendar years 2021 and 2022.

Anti-Abuse Rule
The anti-abuse rule in Reg. §1.871-15(o) will continue to apply during the phase-in years. This means that a transaction that would not otherwise be treated as a Code Sec. 871(m) transaction (including as a result of the new guidance) might still be a Code Sec. 871(m) transaction under the anti-abuse rule.

Taxpayer Reliance
Taxpayers and withholding agents can rely on the new guidance before the Treasury and IRS amend the Code Sec. 871(m) regulations and the 2017 QI Agreement.

The upcoming filing season is expected to be challenging for taxpayers and the IRS as new requirements under the Patient Protection and Affordable Care Act kick-in. Taxpayers, for the first time, must make a shared responsibility payment if they fail to carry minimum essential health care coverage or qualify for an exemption. At the same time, there is growing uncertainty over one of the key elements of the Affordable Care Act: the Code Sec. 36B premium assistance tax credit as litigation makes its way to the U.S. Supreme Court.

The upcoming filing season is expected to be challenging for taxpayers and the IRS as new requirements under the Patient Protection and Affordable Care Act kick-in. Taxpayers, for the first time, must make a shared responsibility payment if they fail to carry minimum essential health care coverage or qualify for an exemption. At the same time, there is growing uncertainty over one of the key elements of the Affordable Care Act: the Code Sec. 36B premium assistance tax credit as litigation makes its way to the U.S. Supreme Court.

Individual shared responsibility payment

Individuals who are not exempt from the individual mandate and who do not carry minimum essential coverage in 2014 must make a shared responsibility payment. The payment is due when the individual files his or her 2014 tax return in 2015. In November, the IRS’s national ACA coordinator said that the agency will work with individuals who owe a shared responsibility payment and may not have the resources to make the payment when they file their return. Keep in mind that the IRS will apply any refund to a taxpayer’s unpaid shared responsibility payment. The IRS cannot, however, use its lien and levy power to collect an unpaid shared responsibility payment.

Note. For 2014, the shared responsibility payment amount generally is the greater of: One percent of the person's household income that is above the tax return threshold for their filing status; or a flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285. The individual shared responsibility payment, however, does not stay at this level after 2014. By 2016, the payment grows significantly.

In November, the IRS clarified when Medicaid coverage qualifies as minimum essential coverage and when it may not. The IRS also clarified how employer contributions to a cafeteria plan impact minimum essential coverage. Final regulations exclude employer contributions to a cafeteria plan from an employee’s household income for purposes of determining minimum essential coverage,

Exemptions

The IRS reminded individuals in November that they may be exempt from the requirement to carry minimum essential coverage. There are nine main exemptions: religious conscience; health care sharing ministries; members of federally recognized Native American nations; individuals whose income is below the minimum return filing threshold; individuals with a short coverage gap; hardship cases; affordability cases; incarcerated individuals; and individuals not lawfully present in the U.S.

Some exemptions are obtained through the Marketplaces, some through the filing process, and some either way. The exemptions for members of federally recognized Native American nations, members of health care sharing ministries and individuals who are incarcerated are available either from the Marketplace or claiming the exemption as part of filing a federal income tax return. The exemptions for lack of affordable coverage, a short coverage gap, and household income below the filing threshold and individuals who are not lawfully present in the U.S. may be claimed only as part of filing a federal income tax return. In November, the IRS removed references to specific hardships and streamlined the process for obtaining an exemption because of a hardship.

Code Sec. 36B litigation

The Code Sec. 36B premium assistance tax credit helps offset the cost of health insurance obtained through the ACA Marketplace. According to the U.S. Department of Health and Human Services (HHS), more than two-thirds of enrollees in Marketplace coverage were eligible for the credit in 2014. IRS regulations for the credit, however, have come under fire for being contrary to the ACA. The regulations allow enrollees in state-run Marketplaces and federal-facilitated Marketplaces to claim the credit. 

In July, the U.S. Court of Appeals for the District of Columbia Circuit struck down the IRS regulations in Halbig, 2014-2 USTC ¶50,366. The D.C. Circuit found that the plain language of the Affordable Care Act limits the credit to enrollees in state-run Marketplaces. In contrast, the Court of Appeals for the Fourth Circuit upheld the regulations in King, 2014-2 USTC ¶50,367. The Fourth Circuit found that it could not say definitively that Congress intended to limit the Code Sec. 36B credit to individuals who obtain insurance through state-run Marketplaces.

The U.S. Supreme Court announced in November that it will hear an appeal of King. The Supreme Court is expected to hear oral arguments about the IRS regulations in early 2015. A decision will likely be announced in June 2015. Our office will keep you posted of developments.

Open enrollment

The ACA Marketplace opened for enrollment for 2015 coverage on November 15 and runs through February 15, 2015. HHS explained that it has streamlined application procedures for individuals who are renewing coverage and who are applying for coverage for the first time. The Small Business Health Option Program (SHOP) also opened on November 15. Small employers (employers with 50 or fewer full-time equivalent employees) may enroll qualified employees in health coverage through SHOP.

Please contact our office if you have any questions about the Affordable Care Act and the new requirements.

As most people know, a taxpayer can take a distribution from an IRA without being taxed if the taxpayer rolls over (contributes) the amount received into an IRA within 60 days. This tax-free treatment does not apply if the individual rolled over another distribution from an IRA within the one-year period ending on the day of the second distribution.

As most people know, a taxpayer can take a distribution from an IRA without being taxed if the taxpayer rolls over (contributes) the amount received into an IRA within 60 days. This tax-free treatment does not apply if the individual rolled over another distribution from an IRA within the one-year period ending on the day of the second distribution.

Taxpayers and the IRS both believed that this one-rollover-per-year limit was applied separately to each IRA owned by the individual. If an individual owned two IRAs, for example, the taxpayer could do two rollovers in the appropriate period - one from each IRA. The IRS applied this interpretation in proposed regulations and in Publication 590, IRAs.

One rollover per taxpayer

In Bobrow, TC Memo. 2014-21, CCH Dec. 59,823(M), issued in January 2014, the Tax Court concluded that a taxpayer could make only one nontaxable rollover between IRAs within a one-year period, regardless of how many IRAs the taxpayer maintained. Thus, the one-per-year limit applied to the taxpayer, not to each separate IRA owned by the taxpayer.

In Notice 2014-15 and Announcement 2014-32, the IRS indicated that it would follow the Bobrow interpretation. It withdrew the proposed regulations, and will issue a new Publication 590-A, Contributions to IRAs, that applies the Bobrow interpretation.

Transition rule

In the notice and the announcement, the IRS provided a transition rule that it will not apply the new interpretation of the limit on permissible IRA rollovers until January 1, 2015. A distribution from an IRA in 2014 that is rolled over to another IRA will be disregarded in applying the new rule to 2015 distributions, provided that the 2015 distribution is from a different IRA that was included in the 2014 rollover.

Exceptions

The IRS noted that there are several types of rollovers that that are not subject to the Bobrow rule: a rollover from a traditional IRA to a Roth IRA; a rollover to or from a qualified plan; and trustee-to-trustee transfers. The IRS stated that trustees can accomplish a trustee-to-trustee transfer by transferring amounts directly between IRAs, or by providing the IRA owner with a check made payable to the trustee of the receiving IRA.

However, a rollover between Roth IRAs would preclude a separate rollover within the one-year period between the individual's traditional IRAs; similarly, a rollover between traditional IRAs would preclude a rollover between Roth IRAs with the one-year period.

The Affordable Care Act—enacted nearly five years ago—phased in many new requirements affecting individuals and employers. One of the most far-reaching requirements, the individual mandate, took effect this year and will be reported on 2014 income tax returns filed in 2015. The IRS is bracing for an avalanche of questions about taxpayer reporting on 2014 returns and, if liable, any shared responsibility payment. For many taxpayers, the best approach is to be familiar with the basics before beginning to prepare and file their returns.

The Affordable Care Act—enacted nearly five years ago—phased in many new requirements affecting individuals and employers. One of the most far-reaching requirements, the individual mandate, took effect this year and will be reported on 2014 income tax returns filed in 2015. The IRS is bracing for an avalanche of questions about taxpayer reporting on 2014 returns and, if liable, any shared responsibility payment. For many taxpayers, the best approach is to be familiar with the basics before beginning to prepare and file their returns.

Individual mandate

Beginning January 1, 2014, the Affordable Care Act requires individuals (and their dependents) to have minimum essential health care coverage or make a shared responsibility payment, unless exempt. This is commonly called the "individual mandate."

Employer reporting

Nearly all employer-provided health coverage is treated as minimum essential coverage. This includes self-insured plans, COBRA coverage, and retiree coverage. Large employers will provide employees with new Form 1095-C, Employer-Provided Health Insurance Coverage and Offer, which will report the type of coverage provided. The IRS has encouraged employers to voluntarily report starting in 2015 for the 2014 plan year. Mandatory reporting begins in 2016 for the 2015 plan year.

Marketplace coverage

Coverage obtained through the Affordable Care Act Marketplace is also treated as minimum essential coverage. Marketplace enrollees should expect to receive new Form 1095-A, Health Insurance Marketplace Statement, from the Marketplace. Individuals with Marketplace coverage will indicate on their returns that they have minimum essential coverage. Because so many individuals with Marketplace coverage also qualify for a special tax credit, they will also likely need to complete new Form 8962, Premium Tax Credit (discussed below).

Medicare, Medicaid and other government coverage

Medicare, TRICARE, CHIP, Medicaid, and other government health programs are treated as minimum essential coverage. There are some very narrow exceptions but overall, most government-sponsored coverage is minimum essential coverage.

Exemptions

Some individuals are expressly exempt under the Affordable Care Act from making a shared responsibility payment. There are multiple categories of exemptions. They include:

• Short coverage gap
• Religious conscience
• Federally-recognized Native American nation
• Income below income tax return filing requirement

The short coverage gap applies to individuals who lacked minimum essential coverage for less than three consecutive months during 2014. They will not be responsible for making a shared responsibility payment. Individuals who are members of a religious organization recognized as conscientiously opposed to accepting insurance benefits also are exempt from the individual mandate. Similarly, members of a federally-recognized Native American nation are exempt. If a taxpayer’s income is below the minimum threshold for filing a return, he or she is exempt from making a shared responsibility payment.

The IRS has developed new Form 8965, Health Coverage Exemptions. Taxpayers exempt from the individual mandate will file Form 8965 with their federal income tax return.

Shared responsibility payment

All other individuals - individuals without minimum essential coverage and who are not exempt - must make a shared responsibility payment when they file their 2014 return. For 2014, the payment amount is the greater of: One percent of the person’s household income that is above the tax return threshold for their filing status; or a flat dollar amount, which is $95 per adult and $47.50 per child, limited to a maximum of $285. The individual shared responsibility payment is capped at the cost of the national average premium for the bronze level health plan available through the Marketplace in 2014. Taxpayers will report the amount of their individual shared responsibility payment on their 2014 Form 1040.

The IRS has cautioned that it will offset a taxpayer’s refund if he or she fails to make a shared responsibility payment if required. However, the Affordable Care Act prevents the IRS from using its lien and levy authority to collect an unpaid shared responsibility payment.

Code Sec. 36B credit

Only individuals who obtain coverage through the Marketplace are eligible for the Code Sec. 36B premium assistance tax credit. The U.S. Department of Health and Human Services (HHS) has reported that more than two-thirds of Marketplace enrollees are eligible for the credit and many enrollees have received advance payment of the credit.

All advance payments of the credit must be reconciled on new Form 8962, which will be filed with the taxpayer’s income tax return. Taxpayers will calculate the actual credit they qualified for based on their actual 2014 income. If the actual premium tax credit is larger than the sum of advance payments made during the year, the individual will be entitled to an additional credit amount. If the actual credit is smaller than the sum of the advance payments, the individual’s refund will be reduced or the amount of tax owed will be increased, subject to a sliding scale of income-based repayment caps.

A change in circumstance, such as marriage or the birth/adoption of a child, could increase or decrease the amount of the credit. Individuals who are receiving an advance payment of the credit should notify the Marketplace of any life changes so the amount of the advance payment can be adjusted if necessary. Please contact our office if you have any questions about the Code Sec. 36B credit.

IRS officials have told Congress that the agency is ready for the new filings and reporting requirements. Our office will keep you posted of developments.

Businesses generally want to write off costs more quickly, to reduce their taxable income and their tax burden. One mechanism for accomplishing this is to deduct the costs of depreciable property rather than capitalizing them. Under Code Sec. 179, taxpayers can expense a prescribed amount of their costs for tangible depreciable property, even if the ordinary accounting treatment would be to capitalize the costs.

Businesses generally want to write off costs more quickly, to reduce their taxable income and their tax burden. One mechanism for accomplishing this is to deduct the costs of depreciable property rather than capitalizing them. Under Code Sec. 179, taxpayers can expense a prescribed amount of their costs for tangible depreciable property, even if the ordinary accounting treatment would be to capitalize the costs.

Code Sec. 179 applies primarily to personal property, but can apply to some real property. In recent years (through 2013), the expensing limit has been as high as $500,000 a year. However, for 2014, the expensing deduction limit is $25,000. (Congress could raise the limit for 2014 but has not done so.)

Because of the dramatic reduction in the Code Sec. 179 expensing limits, taxpayers may want to consider using the de minimis safe harbor in the final "repair" regulations as an alternative means of deducting costs that they would otherwise have to capitalize. The IRS issued final repair regulations in 2013 on the treatment of costs incurred with respect to depreciable property. The regulations are effective for tax years beginning on or after January 1, 2014 and provide guidance on whether to expense or capitalize relevant costs.

The safe harbor

The de minimis safe harbor applies to smaller priced items used in the business. The safe harbor can apply in the following situation: a taxpayer with a $500 per item expensing policy buys 1,000 calculators for $100 each. If the taxpayer elects the safe harbor, the taxpayer can deduct the entire cost of the calculators in the year paid or incurred. The total deduction is $100,000, much greater than the $25,000 limit under Code Sec. 179 for 2014.

The safe harbor is an election, not an accounting method. It can be applied for any year (or not) as determined by the taxpayer. The taxpayer can make an election for 2014, for example. The deadline is the extended due date of the taxpayer’s original income tax return. An election statement must be attached to the return. The election is irrevocable.

Two alternatives

There are two alternative de minimis safe harbors. The primary safe harbor, for use by any taxpayer but primarily for larger entities, allows taxpayers to deduct items that cost $5,000 or less (per item or invoice). The items must be deductible under the taxpayer’s financial accounting procedures and in accordance with the company’s applicable financial statement (AFS). An AFS is a financial statement filed with the Securities and Exchange Commission or another government agency, or a certified audited financial statement. The taxpayer must also have a written accounting policy, put into effect at the beginning of the year, to treat the cost of the items as an expense.

Similar requirements apply to smaller business taxpayers who do not have an AFS, with the following two differences: the accounting policy does not have to be in writing; and the amount paid for the property may not exceed $500 per invoice or per item. If the cost of the items exceeds $500 per item, the taxpayer must capitalize the cost. The taxpayer cannot avoid the $500 (or $5,000) threshold by breaking an item into components whose separate cost is below the limit. For example, the taxpayer could not split the cost of a truck into separate components such as the engine, cab, and chassis.