BAZELLA DOMBROWSKI & CO CPAs

A "phase two" tax reform outline could be unveiled by House GOP tax writers by August. Republicans have started to increase their tax meetings related to the effort, House Ways and Means Committee Chairman Kevin Brady, R-Tex., told reporters on June 13.

Tax Reform "2.0" Timeline

The precise timing of a "phase two" tax reform bill or discussion draft release remains "to-be-determined," a House Ways and Means Committee spokesperson told Wolters Kluwer on June 14. However, Brady told reporters he expects to see a legislative package outlined before the House’s August recess.

Previously, White House Legislative Affairs Director Marc Short predicted a late-summer release of the House’s tax bill. Further, House Majority Leader Kevin McCarthy, R-Calif., has predicted that the House will approve the measure before midterm elections in November.

Individual Tax Cuts

Brady reiterated to reporters that "phase two" will focus on the individual side of the tax code. Moreover, making permanent the individual tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) will be the "centerpiece" of a " phase two" bill, Brady reportedly said. Additionally, Republican tax writers are considering proposals that would streamline the retirement savings process, a Ways and Means spokesperson previously told Wolters Kluwer.

Phase Two Fate Uncertain

The next major tax bill’s fate in the Senate remains uncertain. At least nine Democratic votes will be needed to reach the Senate’s 60-vote threshold. Brady has said he is hopeful for Democratic support.

However, Democratic lawmakers in the House and Senate remain largely opposed to the TCJA. Democrats have criticized the TCJA for primarily benefiting corporations. However, House Republicans are hopeful for bipartisan support on a new measure that focuses primarily on individual tax cuts.

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A bipartisan group of House and Senate lawmakers have introduced companion Historic Rehabilitation Tax Credit (HTC) bills. The measure aims to strengthen the HTC by encouraging investment and minimizing administrative burdens, according to the lawmakers.

Rehabilitation Credit

As amended by the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97), the rehabilitation credit under Code Sec. 47 is limited to 20 percent of qualified rehabilitation expenditures (QREs) of the taxpayer for qualified rehabilitated buildings. The credit is claimed ratably over a five-year period beginning in the tax year in which the rehabilitated building is placed in service. A "qualified rehabilitated building" (QRB) is a building and its structural components for which depreciation is allowable, and that has been substantially rehabilitated and placed in service before the beginning of the rehabilitation. The building must be a certified historic structure, but any expenditure attributable to rehabilitation of the structure is not a QRE unless it is a certified rehabilitation.

Property is considered substantially rehabilitated only if the expenditures during an elected 24-month measurement period (60-month period for phased rehabilitations) ending with or within the tax year are greater than the adjusted basis of the property or $5,000.

Basis-Adjustment Requirement

The bipartisan Historic Tax Credit Enhancement Bill, introduced June 13, would eliminate the existing basis-adjustment requirement. Eliminating this requirement would "bring the HTC in line with other tax credits claimed over multiple years," according to a joint press release by the bill’s sponsors.

The measure was introduced by Sens. Bill Cassidy, R-La., Ben Cardin, D-Md., and Susan Collins, R-Me., and Reps. Darin LaHood, R-Ill., and Earl Blumenauer, D-Ore. "Protecting this credit was one of my top priorities in tax reform, and I’m glad there is bipartisan support for making it even better," Cassidy said in the joint press release. Cardin praised the measure for helping to create economic growth.

Improved HTC

Likewise, Collins said the bill would make the HTC easier to use as well as create economic development across the country. Additionally, an improved HTC would create jobs, according to Blumenauer. "Strengthening the Historic Tax Credit will further revitalize American cities while creating local jobs and spurring economic development in communities large and small," Blumenauer said.

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House tax writers have moved two bills through committee. The bills focus on IRS hiring and the tax treatment of mutual ditch irrigation companies. The House Ways and Means Committee approved the measures in a June 21 markup.

IRS Hiring

The Ensuring Integrity in the IRS Workforce bill (HR 3500) would set certain restrictions on the IRS’s hiring policy. The bipartisan bill would amend Code Sec. 7804 to prohibit the rehiring of any employee previously dismissed for certain misconduct issues.

The bill comes after two Treasury Inspector General for Tax Administration (TIGTA) reports noted that the IRS rehired hundreds of former employees with conduct violations. Over 200 of the more than 2,000 former employees rehired between January 2015 and March 2016 were previously terminated from the IRS for a substantiated conduct or performance issue, according to a July 2017 TIGTA report. Inspector General J. Russell George previously told lawmakers that the particular IRS hiring process is "bad decision making."

The bill, sponsored by Reps. Kristi Noem, R-S.D., and Kyrsten Sinema, D-Ariz., originally passed the House with bipartisan support in the 114th Congress. However, the Senate never took up the measure. Also, Sen. Richard Burr, R-N.C., introduced a related bill in the Senate.

"If a person is fired for falsifying information or mishandling sensitive taxpayer data, it’s common sense that individuals should not be rehired," Noem said in a June 21 press release. "Nonetheless, the IRS has done this repeatedly."

Agriculture Tax Reform

Additionally, the Ways and Means Committee approved the Water and Agriculture Tax Reform bill (HR 519). The bill aims to facilitate water leasing and transfers to promote conservation and efficiency. HR 519 would amend the "tax treatment of mutual water storage and delivery companies so that they can maintain their nonprofit status even if more than 15 percent of their revenue comes from nonmembers," according to a June 21 press release by the bill’s sponsor, Rep. Ken Buck, R-Colo.

HR 519 and HR 3500 are now headed to the House floor.

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The American Bar Association (ABA) Section of Taxation has expressed concerns to top Senate tax writers about certain congressional IRS reform efforts. The ABA Section of Taxation sent a June 6 letter to Senate Finance Committee (SFC) Chairman Orrin G. Hatch, R-Utah and ranking member Ron Wyden, D-Ore., regarding the House-approved bipartisan Taxpayer First Act (HR 5444).

IRS Reform

"The administrative reforms included in the House bills are a welcome step forward," Hatch previously told Wolters Kluwer. The House passed a package of bills in April, which aims to restructure the IRS for the first time in 20 years. Hatch told Wolters Kluwer that he is looking forward to working with his colleagues to find a path forward that reflects both House and Senate views on IRS reform.

While the SFC considers the House’s IRS reform package, the ABA Section of Taxation has asked Senate tax writers to consider certain suggestions to enhance IRS restructuring efforts. "We appreciate that Congress has turned its attention to the relationship between taxpayers and the agency charged with the assessment and collection of taxes," the letter said. The ABA Section of Taxation agrees with most of the House-proposed changes but has concerns with certain aspects of the bill, the letter noted.

Appeals

The House bill, HR 5444, proposes the establishment of an independent Office of Appeals along with a "generally available" right to appeal for taxpayers. While the letter to Hatch and Wyden supports a statutory right to appeals, among other things, it expresses concern that the IRS could limit certain taxpayer’s access to an appeal. "To the extent that the Service wishes to deny appeal rights to taxpayers, it should be required to articulate objective standards for when appeals will not be available, so that any Service determination to deny appeal rights can be measured against those standards," the letter said.

Additionally, the letter proposes that Congress remove certain limiting words from the bill’s provisions that discuss taxpayers’ rights to access case files. Currently, the bill states that only "specified taxpayers" will automatically be provided access to their case files. The ABA Section of Taxation urges Congress to allow all taxpayers access to information in their case file, regardless of income thresholds.

Senate Timeline

As for when the SFC will release its anticipated amendments to the House-approved IRS reform package remains unclear. The Senate’s legislative efforts toward restructuring the IRS are expected among lawmakers to be bipartisan.

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The U.S. Supreme Court has determined that nonqualified employee stock options are not taxable compensation under the Railroad Retirement Tax Act (RRTA). The term "money remuneration" in the Act unambiguously excludes "stock."

Background

Several railroads filed a refund claim for overpaid Railroad Retirement taxes. The railroads claimed they overpaid their taxes because they included the value of employee stock options when calculating the tax.

The IRS denied the refund request. The IRS argued that stock options were taxable "money remuneration" under the RRTA because stock can be easily converted into money.

The railroads replied that stock options are not money. Moreover, they argued that when Congress passed the RRTA, it sought to mimic existing industry pension practices. Generally, those practices ignored in-kind benefits like food, lodging, and railroad tickets.

Stock Options Not Money

When Congress adopted the RRTA in 1937, it understood "money" as "currency issued by a recognized authority as a medium of exchange." Stock options do not fall within this definition.

Further, while stock can be bought or sold for money, it is not usually considered a medium of exchange. Few people value goods and services using stock, or buy groceries or pay rent with stock.

Also, adding the word remuneration did not alter the meaning of the word money. Thus, "any form of money remuneration" indicated that Congress wanted to tax money compensation. It did not indicate that Congress wanted to tax things, like stock, that are not money.

Statutory Context

Moreover, the broader statutory context pointed to the same conclusion. For example, the 1939 Internal Revenue Code treated money and stock differently. However, the Federal Insurance Contribution Act taxes all remuneration, including benefits paid in a medium other than cash.

Further, a contemporaneous IRS rule explained that the RRTA taxed all money compensation. The rule lists examples like salaries, wages, commissions and bonuses. It also included things that could be used as money, like scrip. However, the rule did not suggest that stock was taxable compensation.

Thus, Congress knew the difference between money and other forms of compensation. The choice of Congress to use the narrower term for railroad pensions had to be respected.

Reversing and remanding CA-7, 2017-2 ustc ¶50,295.

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A member of the Miccosukee Tribe of Indians of Florida had to pay federal income tax on distributions of gaming income that she and her family received from the tribe. The payments were taxable income under the Indian Gaming Revenue Act, rather than Indian general welfare benefits that were excluded from tax under Code Sec. 139E. Both the taxpayer and the tribe were bound by the decision.

Tribal Distributions

The Miccosukee Tribe distributed income to its members in quarterly payments. Historically, these payments were in the $20 to $25 range. In 1990, however, the tribe opened a gaming center that offered high-stakes bingo, poker, and video pull-tab machines. The tribe’s income, and its distributions to its members, increased substantially.

Each quarter, the tribe used the revenue of the gaming activities to fund per capita distributions to its members. But the tribe disregarded its federal tax obligations on these distributions. It neither reported the distributions nor withheld taxes on them. The tribe also told its members not to discuss the payments with outsiders, not to report them to credit card agencies, and not to cash the distribution checks in places that would report them to the IRS.

For the tax year at issue, the taxpayer received a total of $272,000, which represented payments for herself, her husband, and her two children. She did not file a tax return or pay any income tax for that year.

After the IRS assessed tax, interest and penalties against her, the taxpayer attempted to file a late return that reported the $272,000 as nontaxable income. She did not pay any of her assessment. The tribe intervened in her case as a matter of right.

District Court Decision

The District Court agreed with the IRS that the payments were distributions of gaming income that were fully taxable to the taxpayer. Most of the funds came from the gaming operation. The taxpayer and the tribe did not show what portion may have come from other, nontaxable sources.

Although the $272,000 included payments on behalf of the taxpayer’s husband and children, the taxpayer was responsible for tax on the entire amount. The tribe was structured as a matriarchy. Thus, the taxpayer was the head of her household, and the payments were all made available to her. She also spent all of the payments on household expenses, and she had reported all of the payments as her income when she tried to file a late return.

IGRA vs GWEA

The main issue on appeal was whether the tribe’s distributions were covered by the Indian Gaming Revenue Act or the Tribal General Welfare Exclusion Act.

The Indian Gaming Revenue Act (IGRA) was passed in 1988. It allows an Indian tribe to engage in gaming and distribute the revenue to members on a per capita basis. It also explicitly includes those distributions in a tribe member’s taxable income.

Code Sec. 139E was enacted in 2014 as part of the Tribal General Welfare Exclusion Act (GWEA). It excludes from federal taxation any payment made or services provided to or on behalf of an Indian tribe member under an Indian tribal government program. To be excludible, benefits provided under the program must be for the promotion of general welfare.

The court held that the exemption for Indian general welfare benefits under Code Sec. 139Edoes not apply to the per capita payments an Indian tribe makes from gaming revenue.

The taxpayer and the tribe claimed that GWEA effectively amended IGRA because it was more recent. The court disagreed, clarifying that IGRA applied only to gaming income, while GWEA was a law of general application. Thus, under the rules of statutory construction, IGRA continued to apply to distributions of gaming income because it was more specific than GWEA.

The court also rejected the characterization of the payments as distributions of the tribe’s tax revenues rather than its gaming income. The tax did not affect the nature of the gaming income. Instead, it was merely a mechanism to collect the income and distribute it to members.

The distributions also were not nontaxable income from Indian land, because they did not come directly from the use of the reservation land or its resources. Instead, the distributions came from improvements and related business activities–that is, gambling in the casino.

Effect on the Tribe

The tribe argued that it should not be included in the District Court’s judgment. However, the tribe had intervened as a matter of right because, if the court determined the payments were taxable, the tribe would have to report them and withhold income tax from them.

As an intervenor, the tribe had the same status as an original party. It also fully participated in the trial by arguing motions, attending depositions, presenting evidence, and examining witnesses. Thus, it was bound by the District Court’s judgment.

Affirming a DC Fla. decision, 2016-2 ustc ¶50,474.

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An individual shareholder of an S corporation restaurant operator was not allowed to claim FICA tip credits under Code Sec. 45B that the S corporation did not claim. The shareholder could not unilaterally and retroactively nullify the S corporation’s election to deduct FICA tip taxes.

Background

The restaurants owned by the S corporation had hired “tipped employees” whose earnings came partly from customer tips. The S corporation was required to pay taxes on these tips as part of its FICA tax payments. For the two tax years at issue, the S corporation did not claim any FICA tip credits. Instead, the S corporation deducted its payments of the FICA tip taxes on its Forms 1120S, and did not later amend those returns.

On his amended Forms 1040 for those tax years, the shareholder claimed he was entitled to flowthrough FICA tip credits with respect to his interest in the S corporation.

FICA Tip Credit

Code Sec. 45B allows an employer working in the food and beverage industry to claim business tax credits for the portion of the FICA taxes—i.e., social security and Medicare taxes—that it paid on employee tips in excess of the minimum wage. The employer must have employees who receive tips from customers for providing food or beverages for consumption, and must be deemed to have paid FICA taxes on the tips in excess of the minimum wage. The employer must not have already claimed a deduction for the FICA tax payment. An employer claims its FICA tip credits on Form 8846.

Here, when the S corporation chose to deduct its FICA tax payments, it had made an election not to claim any FICA tip credits. The S corporation never claimed or intended to claim FICA tip credits. Based on this reporting position, the shareholder was not entitled to any flowthrough FICA tip credits for either tax year.

S Corporation Elections

Under Code Sec. 1363(c) and its regulations, elections that affect the computation of items derived from an S corporation generally must be made by the S corporation, not separately by its shareholders. There are two exceptions: the shareholder claims any elections (1) for the deduction and recapture of certain mining exploration expenditures, and (2) for foreign tax credits.

In this case, the shareholder argued in effect that the S corporation’s election to deduct FICA tax payments could be changed unilaterally by his request, made in his capacity as a shareholder, that the S corporation amend its returns to claim the FICA tip credit. The shareholder’s position was rejected based on the plain text of Code Sec. 1363(c), and of Code Sec. 45B(d), which states that the credit does not apply to a taxpayer if the taxpayer elects to have the credit provision not apply.

Further, the Tax Court stated that it refused to create a new precedent that would give each individual shareholder the power to change an S corporation’s tax election unilaterally. Such a change, stated the court, would not only affect the tax liabilities of the requesting shareholder, but could also affect the tax liabilities of the shareholders who have not consented to the change.

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The Treasury Department and the IRS have issued final regulations that:

prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner or certain related entities;
allow consolidated group members that are partners in the same partnership to aggregate their bases in stock distributed by the partnership for purposes of limiting the application of rules that might otherwise cause basis reduction or gain recognition; and
require certain corporations that engage in gain elimination transactions to reduce the basis of corporate assets or to recognize gain.

The Treasury Department and the IRS have issued final regulations that:

prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner or certain related entities;
allow consolidated group members that are partners in the same partnership to aggregate their bases in stock distributed by the partnership for purposes of limiting the application of rules that might otherwise cause basis reduction or gain recognition; and
require certain corporations that engage in gain elimination transactions to reduce the basis of corporate assets or to recognize gain.

The Treasury Decision adopts as final certain rules set forth in proposed regulations issued in 2015, under Code Sec. 337(d) (with only minor, nonsubstantive clarifications) ( NPRM REG-149518-03), and Code Sec. 732(f) ( NPRM REG-138759-14).

The final regulations affect partnerships and their partners, and apply to transactions occurring on or after June 12, 2015. The regulations are effective on June 8, 2018.

Acquisition of Interest in Stock to Avoid Gain on Appreciated Property

A corporation that distributes appreciated property to its shareholders has to recognize gain under Code Secs. 311(b) and 336(a) as if the property were sold to the shareholders for its fair market value. However, taxpayers have tried to postpone or avoiding the recognition of that gain.

For example, if a corporation exchanges appreciated property for its own stock, the corporation would recognize gain on the exchange. But corporations have tried to avoid recognizing that gain by, for example, taking these steps:

the corporation enters into a partnership and contributes appreciated property;
the partnership acquires stock of that corporate partner; then
the partnership makes a liquidating distribution of the stock to the corporate partner.

The final regulations under Code Sec. 337(d) aim to prevent a corporate partner from avoiding gain recognition when it acquires or increases its interest in stock held by a partnership in exchange for appreciated property. Under the final regulations, a corporate partner may recognize gain when it is treated as acquiring or increasing its interest in stock of the corporate partner held by a partnership in exchange for appreciated property in a manner that avoids gain recognition under Code Sec. 311(b) or Code Sec. 336(a). The final regulations also provide exceptions under which a corporate partner is not required to recognize gain.

Limit on Basis Reduction or Gain Recognition for Consolidated Group Members

The final regulations limit rules that cause basis reduction or gain recognition for consolidated group members that are partners in the same partnership. Code Sec. 732(f)limits the basis of a distributed corporation’s property if—

a corporate partner receives a distribution from a partnership of stock in another corporation (distributed corporation);
the corporate partner has control of the distributed corporation, defined as ownership of stock meeting the requirements of Code Sec. 1504(a)(2), immediately after the distribution or at any time thereafter (control requirement); and
the partnership’s basis in the stock immediately before the distribution exceeded the corporate partner’s basis in the stock immediately after the distribution.

Under these circumstances, the basis of the distributed corporation’s property must be reduced by this excess. Further, the corporate partner must recognize gain to the extent that the basis of the distributed corporation’s property cannot be reduced.

In applying this rule, the final regulations allow the bases of consolidated group members to be aggregated if when two conditions are met: (1) two or more of the corporate partners receive a distribution of stock in a distributed corporation from the partnership; and (2) the distributed corporation is or becomes a member of the distributee partners’ consolidated group after the distribution.

Elimination Transactions

Final regulations restrict corporate partners from entering into gain elimination transactions. They focus on attempts to eliminate gain in the stock of a distributed corporation while avoiding the effects of a basis step-down in transactions. Under the regulations, in the event of a gain elimination transaction, Code Sec. 732(f) will apply as though the corporate partner acquired control of the distributed corporation immediately before the gain elimination transaction.

Future Proposed Regs?

The Treasury and IRS are considering publishing a new notice of proposed rulemaking to propose more substantive amendments to the final 337(d) regulations, and to allow for additional public comment with respect to proposals in response to certain comments received, further reflection by the Treasury IRS, and concerns raised by practitioners.

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Participants in the Son of BOSS tax shelter have maintained their perfect losing record in the Tax Court. Thus, another Son-of-Boss deal has failed to produce its promised loss deductions.

Son-of-BOSS Arrangements

Son-of-BOSS is a variation of a slightly older tax shelter known as the "bond and options sales strategy," or BOSS. Son-of-BOSS transactions take many forms, but they all have one thing in common: Assets that are encumbered by significant liabilities must always be transferred to a partnership. The goal is to increase basis in that partnership or in the assets themselves.

The liabilities are usually obligations to buy securities. However, they are typically not completely fixed when they are transferred to the partnership.

This contingency is supposed to let the partnership treat the liabilities as uncertain. This, in turn, is supposed to let the partnership ignore the liabilities in computing basis. The result is supposed to give the partners basis in the partnership or in the assets themselves. This increased basis is supposed to translate into large loss deductions for the partners, all with no actual economic losses.

The Tax Court has yet to fall for the scheme.

Invalid Partnerships

The court has used several theories to reject Son-of-Boss losses. In this case, the court once again relied on the fact that the two partnerships involved in the transactions did not actually exist.

The partnerships were invalid because they were created only to carry out tax avoidance schemes. Thus, their members never intended to run any business through them.

The partnerships also failed the “prongified” test for determining whether the parties intended to, and did in fact, join together for the present conduct of an undertaking or enterprise. One managed to scrupulously adhere to the formal requirements for looking like a partnership. However, it did not display any objective indication of a mutual combination for the conduct of an ongoing enterprise.

The second partnership barely even went through the motions. It filed partnership returns and issued K-1s to its purported partners. However:

There was no evidence the purported partners made any contributions to the partnership;
The partnership did not have a formal operating agreement;
The partnership did not conduct any business in its own name;
There was no real profit for the partners to control or withdraw; and
The partnership did not keep any books or records.

Since the partnerships were invalid, they were simply disregarded. Thus, the purported partners were treated as directly engaging in the partnerships’ activities and directly owning the partnerships’ property. This meant that the supposedly separate long and short options that were the heart of the transaction were actually a single-option spread. Thus the options were part of one contract, and they could not be separated to produce artificial losses.

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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.

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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.

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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.

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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.

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