Newsletters

Department of the Treasury Secretary Janet Yellen offered members of the House Ways and Means Committee limited insight as to how the Biden Administration will handle the provisions of the Tax Cuts and Jobs Act that are expiring in 2025.

Department of the Treasury Secretary Janet Yellen offered members of the House Ways and Means Committee limited insight as to how the Biden Administration will handle the provisions of the Tax Cuts and Jobs Act that are expiring in 2025.

Speaking during an April 30, 2024, hearing, Yellen offered a common retort when pressed about any of the expiring tax cuts – that it is the administration’s position that there will be no new taxes for taxpayers making under $400,000 per year.

"President Biden has said he would oppose allowing tax cuts to expire for people making under $400,000," Yellen testified, but did not qualify that comment with specific provisions that he wants to see extended, other than to simply say that there "will be a negotiation over what to do when these tax cuts expire. And the President, as he does in many other situations, will negotiate with Congress."

She reiterated the principles that will guide future negotiations – the repeatedly stated opposition to anything that raises taxes for those making less than $400,000 and ensuring that the wealthy and large corporations are paying their fair share. She also highlighted that the Biden in his most recent budget proposal is pushing to expand the Child Tax Credit.

Yellen also defended negotiations as part of the OECD from challenges by GOP members of the committee, arguing that the "pillar two agreement that’s been reached is very much in support of goals that are good for this country."

She also touched on the Direct File pilot, repeating recent remarks from Internal Revenue Service Commissioner Daniel Werfel that while the pilot is initially being looked at as successful, the final decision on whether to proceed with it has not been made.

By Gregory Twachtman, Washington News Editor

The IRS has released guidance listing the specific changes in accounting method to which the automatic change procedures set forth in Rev. Proc. 2015-13, I.R.B. 2015-5, 419, apply. The latest guidance updates and supersedes the current list of automatic changes found in Rev. Proc. 2023-24, I.R.B. 2023-28, 1207.

The IRS has released guidance listing the specific changes in accounting method to which the automatic change procedures set forth in Rev. Proc. 2015-13, I.R.B. 2015-5, 419, apply. The latest guidance updates and supersedes the current list of automatic changes found in Rev. Proc. 2023-24, I.R.B. 2023-28, 1207.

Significant changes to the list of automatic changes in Rev. Proc. 2023-24 include:

• The following sections are removed because these sections are obsolete:
• (1) The following sections are removed because these sections are obsolete:
• (a) Section 7.01, relating to changes to a different method or different amortization period for research and experimental expenditures;
• (b) Section 12.18, relating to late revocation of elections under Code Sec. 263A(d)(3); and;
• (c) Section 20.13, relating to an accrual method taxpayer that wants to change its method of accounting for one or more inventory costs to treat such costs as incurred in accordance with Reg. §§1.461-1(a)(2) and 1.461-4(d)(4);
• (2) Section 3.12, relating to a taxpayer that wants to change its treatment of natural gas transmission and distribution property costs to use the natural gas transmission and distribution property safe harbor method of accounting (NGSH Method) under Rev. Proc. 2023-15, is clarified as follows. First, by adding new paragraph 3.12(8) to allow a taxpayer changing to the NGSH Method to choose to treat a method change filed for the taxpayer’s second taxable year ending after May 1, 2023, as filed for the taxpayer’s first taxable year ending after May 1, 2023, solely for purposes of the special rule under section 5.08(3)(a) of Rev. Proc. 2023-15. Second, section 3.12(3)(c)(ii) is clarified to provide that if the taxpayer’s change to the NGSH Method described in Rev. Proc. 2023-15 applies to any asset that is public utility property within the meaning of Code Sec. 168(i)(1), then the taxpayer will adjust its deferred tax reserve account or similar account in the taxpayer’s regulatory books of account by the amount of the deferral of federal income tax liability associated with the Code Sec. 481(a) adjustment applicable to the public utility property subject to the Form 3115 if such amount is no longer being normalized for regulatory purposes by the taxpayer;
• (3) Section 6.01, relating to changing from an impermissible to a permissible method of accounting for depreciation or amortization, is modified to remove the second sentence of section 6.01(1)(c)(xx), providing that the change in method of accounting under section 6.21 could be filed under section 6.01 if the duplicate copy was properly filed under section 6.01 before May 11, 2021, because this language is obsolete;
• (4) Section 6.18, relating to changing from an impermissible to a permissible method of accounting for an item of qualified improvement property placed in service after December 31, 2017, is modified by removing paragraph (2), providing a temporary waiver of the eligibility rule in sections 5.01(1)(d) and 5.01(1)(f) of Rev. Proc. 2015-13, because this language is obsolete;
• (5) Section 6.19, relating to certain late elections under §§ 168 and 1502 or revocation of certain elections under Code Sec. 168, is modified to remove all references to Rev. Proc. 2020-25, I.R.B. 2020-19, 785, because these references as used in section 6.19 are obsolete;
• (6) Section 6.21, relating to depreciation of tangible property under Code Sec. 168(g) by controlled foreign corporations, is modified by removing the sunset provision in paragraph (3) to permit CFCs to continue to change their depreciation method to the alternative depreciation system (ADS) in Code Sec. 168(g) under the automatic change procedures of Rev. Proc. 2015-13 (regardless of whether the CFC’s historic depreciation method was permissible or impermissible);
• (7) Section 7.01, relating to a changing the method of accounting for SRE expenditures, is modified and clarified as follows. First, new section 7.01(2)(c) is added to clarify that section 7.01(1)(a) of this revenue procedure does not apply to a change to rely on interim guidance provided in sections 8 and 9 of Notice 2023-63, as modified by Notice 2024-12. Second, section 7.01(5)(a) is modified to provide that the eligibility rule in section 5.01(1)(d) of Rev. Proc. 2015-13 (relating to changes in the final year of a trade or business) does not apply to a change described in section 7.01(1)(a) of this revenue procedure for the taxpayer’s first or second taxable year beginning after December 31, 2021. Third, section 7.01(5)(b) is clarified to provide that a taxpayer may make a change described in section 7.01(1)(a) of this revenue procedure for its second taxable year beginning after December 31, 2021, regardless of whether the taxpayer made a change for the same item for its first taxable year beginning after December 31, 2021. Fourth, section 7.01(6) is clarified to provide that a taxpayer does not receive audit protection under section 8.01 of Rev. Proc. 2015-13 for a change under section 7.01(1)(a) of this revenue procedure in the second taxable year beginning after December 31, 2021, with respect to expenditures paid or incurred in the first taxable year beginning after December 31, 2021, if the taxpayer did not change its method of accounting under section 7.01(1)(a) in an effort to comply with § 174 for the first taxable year beginning after December 31, 2021. Fifth, section 7.01(7) is modified to provide that the designated automatic accounting method change number for all changes under section 7.01 of this revenue procedure is “265;"
• (8) Section 12.01, relating to certain uniform capitalization (UNICAP) methods used by resellers and reseller-producers, is modified as follows. First, section 12.01(2)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, is removed because this language is obsolete. Second, to add section 12.01(1)(b)(vi) to provide that the change under section 12.01 does not apply to a taxpayer changing to or from the direct reallocation method or the step-allocation method. Instead, this change must be requested under the non-automatic change procedures provided in Rev. Proc. 2015-13. Third, to add new section 12.01(1)(b)(vii) to provide that the change under section 12.01 does not apply to a taxpayer using the direct reallocation method or step-allocation method that wishes to either make an election or revoke an election to use the 90-10 de minimis rule to allocate a mixed service department’s costs to resale activities. Instead, this change must be requested under the non-automatic change procedures provided in Rev. Proc. 2015-13;
• (9) Section 12.02, relating to certain uniform capitalization (UNICAP) methods used by producers and reseller-producers, is modified as follows. First, section 12.02(4)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13, is removed because this language is obsolete. Second, section 12.02(1)(b)(vi) is added to provide that the change under section 12.02 does not apply to a taxpayer changing to or from the direct reallocation method or the step-allocation method. Instead, this change must be requested under the non-automatic change procedures provided in Rev. Proc. 2015-13. Third, new section 12.02(1)(b)(vii) is added to provide that the change under section 12.02 does not apply to a taxpayer using the direct reallocation method or step-allocation method that wishes to either make an election or revoke an election to use the 90-10 de minimis rule to allocate a mixed service department’s costs to production or resale activities. Instead, this change must be requested under the non-automatic change procedures provided in Rev. Proc. 2015-13;
• (10) Section 12.07, relating to a change not to apply Code Sec. 263A to one or more plants removed from the list of plants that have a preproductive period in excess of two years, is modified to remove section 12.07(2), providing audit protection that applies to blackberry, raspberry, and papaya plants for taxable years that end on or before February 15, 2013, because this language is obsolete;
• (11) Section 12.16, relating to the small taxpayer exception from the requirement to capitalize costs under Code Sec. 263A, is modified to remove section 12.16(3)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain taxpayers, because this language is obsolete;
• (12) Section 15.01, relating to changes in overall method from the cash receipts and disbursements method (cash method) to an accrual method is modified to remove section 15.01(5)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(e) of Rev. Proc. 2015-13 for changes to comply with Code Sec. 451(b), because this language is obsolete;
• (13) Section 15.17, relating to small business taxpayers changing the overall method of accounting to the cash method or to a method of accounting in which the small business taxpayer uses an accrual method for purchases and sales of inventories and uses the cash method of accounting for computing all other items of income and expense, is modified to remove section 15.17(6)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(e) of Rev. Proc. 2015-13 for certain taxpayers, because this language is obsolete;
• 14) Section 16.08, relating to changes in the timing of income recognition under Code Sec. 451(b) and (c), is modified and clarified as follows. First, section 16.08(3)(a) is added, to clarify that a change under section 16.02 does not apply to a change to comply with the all events test in Reg. §1.451-1(a). Instead, this change must be requested under the non-automatic change procedures provided in Rev. Proc. 2015-13. Second, section 16.08 is modified to remove section 16.08(4)(a), relating to short Form 3115, because it is obsolete. Third, section 16.08 is modified to remove section 16.08(4)(c), relating to streamlined method change procedures for certain taxpayers, because it is obsolete. Fourth, section 16.08 is modified to remove section 16.08(5)(c), relating to certain changes with a Code Sec. 481(a) adjustment of zero being disregarded for eligibility rules, because it is obsolete. Fifth, section 16.08 is modified to remove section 16.08(6)(a), relating to audit protection for taxpayers using the streamlined method change procedures, because it is obsolete. Sixth, section 16.08 is modified to remove section 16.08(6)(b)(i), relating to audit protection for taxpayers under examination, because it is obsolete. Seventh, section 16.08(7)(b), which provides an ordering rule for concurrent cost-offset related inventory method changes and changes to apply a cost offset method, is modified to require a taxpayer making a cost-offset related inventory method change(s) and a change to the AFS cost offset method or advance payment cost offset method in the same year of change to make the cost-offset related inventory method change(s) first. Sections 16.08(2)(a)(i)(E), 16.08(2)(a)(ii)(F) and 16.08(2)(b)(v), which provide corresponding changes to a cost offset method as a result of cost-offset related inventory method changes, have been modified to apply only to taxpayers presently using a cost offset method, consistent with the new ordering rule. Eighth, the ordering rule for concurrent cost-offset related inventory method changes and corresponding changes to a cost offset method in section 16.08(7)(b) has been moved to a new section 16.08(7)(c); section 16.08(7)(c) is also clarified to provide that a taxpayer may file a single Form 3115 that includes both the cost-offset related inventory method change and the corresponding cost offset change. Ninth, section 16.08(7)(d) is added to provide examples to illustrate the operation of the ordering rules which require a taxpayer to make a cost-offset related inventory method change before a change to apply a cost offset method and a cost-offset related inventory method change before a corresponding change to a cost offset method;
• (15) Section 19.02, regarding changes in method of accounting under Code Sec. 460 to rely on the interim guidance provided in section 8 of Notice 2023-63, I.R.B. 2023-39, 919, is modified as follows. Section 19.02(4) is modified to provide that the eligibility rule in section 5.01(1)(d) of Rev. Proc. 2015-13 (relating to changes in the final year of a trade or business) does not apply to a change described in section 19.02(1) of this revenue procedure for the taxpayer’s first or second taxable year beginning after December 31, 2021;
• (16) Section 22.04, relating to a taxpayer that wants to change from an impermissible method of identifying or valuing inventories to a permissible method of identifying or valuing inventories, is modified to remove section 22.04(1)(d), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes related to a cost offset method, because this language is obsolete;
• (17) Section 22.10, relating to changes to permissible methods of identification and valuation of inventories, is modified by removing section 22.10(1)(d), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes related to a cost offset method, because this language is obsolete;
• (18) Section 22.17, relating to changes from currently deducting inventories to permissible methods of identification and valuation of inventories, is modified by removing section 22.10(1)(d), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes related to a cost offset method, because this language is obsolete;
• (19) Section 22.18, relating to a change by a small business taxpayer to certain Code Sec. 471 methods of accounting, is modified as follows. First, section 22.18(5)(b) and (c), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes, is removed because the language is obsolete. Second, section 22.18 (6)(b), providing streamlined method change procedures for certain taxpayers, is removed because this language is obsolete;
• (20) Section 23.01, relating to certain changes from the LIFO inventory method, is modified as follows. First, section 23.01(2)(b), providing a temporary waiver of the eligibility rule in section 5.01(1)(f) of Rev. Proc. 2015-13 for certain changes, is removed because the language is obsolete. Second, section 23.01(8), denying ruling protection in certain cases, is removed because this language is obsolete; and
• (21) Section 24.02, relating to taxpayers requesting to change their method of accounting from the mark-to-market method of accounting described in Code Sec. 475 to a realization method, is clarified to provide that a dealer in securities making such change under the non-automatic change procedures in Rev. Proc. 2015-13 must also file a Notification Statement that satisfies all applicable requirements of section 24.02(7) of this revenue procedure, including the timely filing requirements.

Subject to a transition rule, this revenue procedure is effective for a Form 3115 filed on or after April 30, 2024, for a year of change ending on or after September 30, 2023, that is filed under the automatic change procedures.

Rev. Proc. 2024-23 amplifies and modifies Rev. Proc. 2023-24, I.R.B. 2023-28, 1207. Rev. Proc. 2011-46, I.R.B. 2011-42, 518, is modified. Rev. Proc. 2024-23 also modifies Rev. Rul. 2004-62, 2004-1 CB 1072; Rev. Rul. 2000-7, 2000-9 CB 712; Rev. Rul. 2000-4, 2000-1 CB 331; Rev. Proc. 2007-48, 2007-2 CB 110; Rev. Proc. 2007-16, C.B. 2007-1, 358; and Rev. Proc. 2000-50, I.R.B. 2000-52, 601.

Rev. Proc. 2024-23

The IRS intends to amend the base erosion and anti-abuse tax (BEAT) regulations under Code Secs. 59A and 6038A to defer the applicability date of the reporting of qualified derivative payments (QDPs) until tax years beginning on or after January 1, 2027. Until these reporting rules apply, the current transition period rules for QDP reporting will continue to apply.

The IRS intends to amend the base erosion and anti-abuse tax (BEAT) regulations under Code Secs. 59A and 6038A to defer the applicability date of the reporting of qualified derivative payments (QDPs) until tax years beginning on or after January 1, 2027. Until these reporting rules apply, the current transition period rules for QDP reporting will continue to apply.

Background

Final BEAT regulations adopted with T.D. 9885 include rules under Code Secs. 59A and 6038A addressing the reporting of QDPs, which are not treated as base erosion payments for BEAT purposes. The final regulations generally apply to tax years ending on or after December 17, 2018.

In general, a payment qualifies for the QDP exception if the taxpayer satisfies certain reporting requirements. Reg. §1.6038A-2(b)(7)(ix) requires a taxpayer subject to the BEAT to report on Form 8991, Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts, the aggregate amount of QDPs for the tax year and make a representation that all payments satisfy the requirements of Reg. §1.59A-6(b)(2). If a taxpayer fails to satisfy these reporting requirements, those payments are not eligible for the QDP exception and are treated as base erosion payments, unless another exception applies.

The QDP reporting rules of Reg. §1.6038A-2(b)(7)(ix) apply to tax years beginning on or after June 7, 2021. Before these rules are applicable, there is a transition period during which a taxpayer is treated as satisfying the QDP reporting requirements to the extent that the taxpayer reports, in good faith, the aggregate amount of QDPs on Form 8991, Schedule A (Reg. §1.59A-6(b)(2)(iv) and Reg. §1.6038A-2(g)).

In Notice 2022-30, I.R.B. 2022-28, 70, the IRS announced the intention to extend the transition period through tax years beginning before January 1, 2025, while it is studying the interaction of the QDP exception, the BEAT netting rule in Reg. §1.59A-2(e)(3)(vi), and the QDP reporting requirements. The IRS has not yet issued regulations amending the applicability date of Reg. §1.6038A-2(g). Since the IRS continue to study these provisions, it has determined that it is appropriate to further extend the transition period.

Deferred Applicability Date of QDP Reporting and Taxpayer Reliance

The IRS intends to amend Reg. §1.6038A-2(g) to provide that the QDP reporting rules of Reg. §1.6038A-2(b)(7)(ix) will apply to tax years beginning on or after January 1, 2027. Until these rules apply, the transition period rules described above will continue to apply. Taxpayers may rely on this Notice before the amendments to the final regulations are issued.

Notice 2022-30 is modified, and as so modified, is superseded.

Notice 2024-43

In an effort to increase awareness of and participation in the alternative dispute resolution process, the Internal Revenue Service Independent Office of Appeals has formed an Alternative Dispute Resolution Program Management Office.

In an effort to increase awareness of and participation in the alternative dispute resolution process, the Internal Revenue Service Independent Office of Appeals has formed an Alternative Dispute Resolution Program Management Office.

The ADR PMO launch comes in the wake of a U.S. Government Accountability Office report in 2023 that found a 65 percent decline in the use of various existing ADR programs. In fiscal year 2014, there were 429 ADR cases closed. That number dropped to 119 in fiscal year 2022.

"The GAO recommended that we have a more robust program around managing these [ADR] programs, collecting data, and having a neutral contact point within the IRS that taxpayers and their representatives could contact," IRS Acting Chief of Appeals Liz Askey said in an interview. "So, I think the Program Management Office serves a lot of those purposes, in addition to education and outreach, both internally and externally."

The new office is "partly in response to [the GAO report], and also in conjunction with ongoing transformation efforts within the IRS, and more specifically around Initiative 2.4 of the Strategic Operating Plan, which deals with reaching certainty sooner in disputes between the IRS and taxpayers," Askey said.

And the first step to getting greater participation is improving the awareness of the various ADR options, particularly within the IRS.

"I do think awareness was a factor" in the decreased ADR participation rates, Askey said. "There was a lot of buzz and emphasis on these programs when they were first rolled out. I think both awareness and emphasis on the programs within the IRS declined over the years."

She noted that as new people joined the agency, they just were not aware of the different programs and their benefits.

"We hired some new people and there just wasn’t as much training and emphasis" on ADR, Askey said. "Similarly, as a result, that public awareness of the programs waned a little bit. Awareness and education are some things that the Program Management Office will be focused on – both internal training as well as external education and outreach."

She also said the newly launched office will also look at providing more flexibility to ADR programs "to make them more attractive and user friendly to a wider group of people."

One example she offered was around fast track settlements, noting that current procedures make them available at the end of an audit and only if all issues of that audit are eligible to be fast tracked. Under current procedures, one could not fast track specific issues in an ADR program.

"There are things like that that we can tweak and that we think will make the existing programs more attractive or user friendly," she said.

Michael Baillif, who recently joined the IRS Office of Appeals and will serve as the director of the ADR PMO, added that another goal of the ADR PMO is to expand who uses ADR programs and the ease of use of them.

"What our changes are doing is to try to make ADR more easily accessible," he said, noting that it could have been a stumbling block to participation.

As far as who is being targeted for use of ADR, "one area where we see there’s some real potential benefit [and a] real possibility for growth is in the area of small dollar cases," Baillif said. "ADR is perfect in that situation. It’s less resource intensive and it’s really tailor-made for smaller cases. We see that as an audience in particular that could really benefit from our newer initiatives."

And when he talks about resources, he is talking both for the IRS and the taxpayer. ADR can resolve a case earlier, which saves money for the agency and for the taxpayer, especially those who have representation hired to help with their case, they might not need to pay as much for representation as the cases can get resolved quicker through ADR.

Additionally, "ADR, in many respects, can be a bit of a less formal process," Baillif said. "And it is very dialogue-based, so it’s also very helpful for taxpayers without representatives, who might have been kind of daunted by some of the non-ADR proceedings. ADR is a very taxpayer-friendly approach."

The agency announced that the Program Management Office will pilot changes to Fast Track Settlement – a program that allows Appeals to mediate disputes between a taxpayer and the IRS while the case is still in Exam’s jurisdiction – as well as remove barriers to post-appeals mediation, which introduces a new mediator if the parties are unable to reach agreement during traditional Appeals settlement negotiations. Other early plans by the office include testing ADR programs that allow Appeals to help resolve or mediate disputes earlier in the examination process; streamline and clarify existing guidance; and remove barriers to enable easier use and access to ADR.

By Gregory Twachtman, Washington News Editor

The IRS has released proposed regulations that provide guidance regarding information reporting of transactions with foreign trusts and receipt of large foreign gifts and regarding loans from, and uses of property of, foreign trusts. Further, the IRS has issued proposed amendments to the regulations relating to foreign trusts having one or more U.S. beneficiaries. The proposed regulations affect U.S. persons who engage in transactions with, or are treated as the owners of, foreign trusts, and U.S. persons who receive large gifts or bequests from foreign persons.

The IRS has released proposed regulations that provide guidance regarding information reporting of transactions with foreign trusts and receipt of large foreign gifts and regarding loans from, and uses of property of, foreign trusts. Further, the IRS has issued proposed amendments to the regulations relating to foreign trusts having one or more U.S. beneficiaries. The proposed regulations affect U.S. persons who engage in transactions with, or are treated as the owners of, foreign trusts, and U.S. persons who receive large gifts or bequests from foreign persons.

The proposed regulations generally incorporate the Code Sec. 643(i) guidance that was provided in Notice 97-34, with certain modifications to provide procedural rules, such as how to determine a loan’s yield to maturity and how to extend the period of assessment for any income tax associated with the loan, and anti-abuse rules, such as requiring payments and information reporting to be timely. In addition, the proposed regulations provide guidance implementing the Hiring Incentives to Restore Employment (HIRE) Act amendments to Code Sec. 643(i).

Application of Code Sec.643(i) to loans by or uses of property of a foreign trust

Proposed Reg. §1.643(i)-1(b)(1) provides that, unless an exception applies, any loan of cash or marketable securities made from a foreign trust (whether from trust corpus or income) directly or indirectly to a U.S. grantor or beneficiary of the trust or to any U.S. person related to a U.S. grantor or beneficiary of the trust is treated as a Code Sec. 643(i) distribution to such U.S. grantor or beneficiary as of the date on which the loan is made. Indirect loans for purposes of Code Sec. 643(i) to include loans made through an intermediary, agent or nominee.

Exceptions

Proposed Reg. §1.643(i)-2(a) provides four exceptions to the general rule of Proposed Reg. §1.643(i)-1(b)(1):

• The general rule will not apply to any loan of cash in exchange for a qualified obligation within the meaning of Proposed Reg. §1.643(i)-2(b)(2)(iii).
• In the case of a use of trust property other than a loan of cash or marketable securities, the general rule will not apply to the extent that the foreign trust receives the fair market value of such use within a reasonable period (60 days or less) from the start of the use of the trust property.
• The general rule will not apply to any de minimis use of trust property (aggregate use by members of a group consisting of the U.S. grantors and beneficiaries and the U.S. persons related to them for a total of 14 days or less during the taxable year), other than a loan of cash or marketable securities, by a U.S. grantor or beneficiary or a U.S. person related to a U.S. grantor or beneficiary
• The general rule will not apply to a loan of cash that is made by a foreign corporation to a U.S. beneficiary of the foreign trust to the extent the aggregate amount of all such loans to the beneficiary does not exceed undistributed earnings and profits of the foreign corporation attributable to amounts that are, or have been, included in the beneficiary’s gross income under Code Secs. 951, 951A or 1293.

Qualified Obligation

Under Proposed Reg. §1.643(i)-2(b)(2)(iii)(A), the term qualified obligation means an obligation that satisfies all of the following requirements:

• First, the obligation must be in writing.
• Second, the term of the obligation must not exceed five years.
• Third, all payments on the obligation must be made in cash in U.S. dollars.
• Fourth, the obligation must be issued at par and must provide for stated interest at a fixed rate or a qualified floating rate within the meaning of Reg. §1.1275-5(b).
• Fifth, the yield to maturity must be not less than 100 percent and not greater than 130 percent of the applicable Federal rate in effect under Code Sec. 1274(d) on the day on which the obligation is issued.
• Sixth, all stated interest on the obligation must be qualified stated interest within the meaning of Reg. §1.1273-1(c).

Reporting Requirements

Proposed Reg. §1.643(i)-2(d) provides that any loan of cash or marketable securities by a foreign trust to a U.S. person and any use by a U.S. person of property belonging to a foreign trust, without regard to whether such loan or use of property is treated as a Code Sec. 643(i) distribution, also is a distribution within the meaning of Proposed Reg. §1.6048-4(b) and subject to the information reporting described under Proposed Reg. §1.6048-4(a).

Tax consequences of a Code Sec. 643(i) distribution

Generally, a foreign trust must treat the Code Sec. 643(i) distribution as an amount properly paid, credited, or required to be distributed by the trust as described in Code Sec.661(a)(2) for which the trust may be allowed a distribution deduction in computing its taxable income. Further, a Code Sec. 643(i) distribution of marketable securities would cause a foreign trust to be deemed to have elected to have Code Sec. 643(e)(3) apply to such distribution, which would cause the trust to recognize gain or loss as if the marketable securities had been sold at fair market value.

Further, any capital gain recognized by the foreign trust would be included in the trust’s distributable net income (DNI) pursuant to Code Sec. 643(a)(6)(C). As a result of the deemed election, a U.S. grantor or beneficiary would be treated as including in gross income under Code Sec. 662(a)(2) the fair market value of the marketable securities, and in computing its taxable income, the foreign trust would be allowed to deduct the fair market value of the marketable securities to the extent allowed under Code Sec. 661(a)(2).

Proposed Reg. §1.6048-4(d) describes the rules that a U.S. person (other than a U.S. owner of the distributing trust) must use to determine the tax consequences of a distribution from a foreign trust other than a distribution that is a loan of cash or marketable securities or the use of other trust property that is not treated as a Code Sec. 643(i) distribution under Proposed Reg. §1.643(i)-1. Two methods to determine the tax consequences are provided: (i) the actual calculation method and (ii) the default calculation method. If the U.S. person who receives the distribution does not receive a copy of the relevant statement, the U.S. person must determine the tax consequences of the distribution under the default calculation method. A U.S. person who receives the relevant statement generally may compute the tax consequences of the distribution under either the actual calculation method or the default calculation method.

Penalty for failure to file information

Under Proposed Reg. §1.6039F-1(e)(1), a U.S. person who fails to furnish the required information is subject to a penalty equal to five percent of the amount of the foreign gift for each month (or portion thereof) for which the failure continues, but not to exceed 25 percent of the amount of the foreign gift.

Further, Proposed Reg. §1.6677-1 provides rules for civil penalties that may be assessed if any notice or return required to be filed under proposed Reg. §§1.6048-2 through 1.6048-4 is not timely filed or contains incomplete or incorrect information.

Applicability Dates

These regulations are proposed to apply to transactions with foreign trusts and the receipt of foreign gifts in taxable years beginning after the date on which the final regulations are published in the Federal Register. However, a taxpayer may rely on these proposed regulations for any taxable year ending after May 8,2024, and beginning on or before the date that final regulations are published in the Federal Register, provided that the taxpayer and all related persons apply the proposed regulations in their entirety and in a consistent manner for all taxable years beginning with the first taxable year of reliance until the applicability date of the final regulations.

Comments and Requests for a Public Hearing

A public hearing has been scheduled for August 21, 2024, at 10 a.m. ET, in the Auditorium at the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington DC.

Persons who wish to present oral comments at the hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic by July 7, 2024. Outlines must be submitted electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-124850-08).

The IRS has released the annual inflation adjustments for 2023 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

The IRS has released the annual inflation adjustments for 2023 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.

2023 Income Tax Brackets

For 2023, the highest income tax bracket of 37 percent applies when taxable income hits:

• $693,750 for married individuals filing jointly and surviving spouses,
• $578,125 for single individuals,
• $578,100 for heads of households,
• $346,875 for married individuals filing separately, and
• $14,450 for estates and trusts.

2023 Standard Deduction

The standard deduction for 2023 is:

• $27,700 for married individuals filing jointly and surviving spouses,
• $20,800 for heads of households, and
• $13,850 for single individuals and married individuals filing separately.

The standard deduction for a dependent is limited to the greater of:

• $1,250 or
• the sum of $400, plus the dependent’s earned income.

Individuals who are blind or at least 65 years old get an additional standard deduction of:

• $1,500 for married taxpayers and surviving spouses, or
• $1,850 for other taxpayers.

Alternative Minimum Tax (AMT) Exemption for 2023

The AMT exemption for 2023 is:

• $126,500 for married individuals filing jointly and surviving spouses,
• $81,300 for single individuals and heads of households,
• $63,250 for married individuals filing separately, and
• $28,400 for estates and trusts.

The exemption amounts phase out in 2023 when AMT exceeds:

• $1,156,300 for married individuals filing jointly and surviving spouses,
• $578,150 for single individuals, heads of households, and married individuals filing separately, and
• $94,600 for estates and trusts.

Expensing Code Sec. 179 Property in 2023

For tax years beginning in 2023, taxpayers can expense up to $1,160,000 in Code Sec. 179 property. However, this dollar limit is reduced when the cost of Code Sec. 179 property placed in service during the year exceeds $2,890,000.

Estate and Gift Tax Adjustments for 2023

The following inflation adjustments apply to federal estate and gift taxes in 2023:

• the gift tax exclusion is $17,000 per donee, or $175,000 for gifts to spouses who are not U.S. citizens;
• the federal estate tax exclusion is $12,920,000; and
• the maximum reduction for real property under the special valuation method is $1,310,000.

2023 Inflation Adjustments for Other Tax Items

The maximum foreign earned income exclusion amount in 2023 is $120,000.

The IRS also provided inflation-adjusted amounts for the:

• adoption credit,
• earned income credit,
• excludable interest on U.S. savings bonds used for education,
• various penalties, and
• many other provisions.

Effective Date of 2023 Adjustments

These inflation adjustments generally apply to tax years beginning in 2023, so they affect most returns that will be filed in 2024. However, some specified figures apply to transactions or events in calendar year 2023.

After acknowledging earlier this year that hackers breached one of its popular online apps, the IRS has promised more identity theft protections in the 2016 filing season. The IRS, along with partners in the tax preparation community, has identified and tested more than 20 new data elements on returns to help detect and prevent identity-theft related filings. The agency is also working to prevent criminals from accessing tax-time financial products.

After acknowledging earlier this year that hackers breached one of its popular online apps, the IRS has promised more identity theft protections in the 2016 filing season. The IRS, along with partners in the tax preparation community, has identified and tested more than 20 new data elements on returns to help detect and prevent identity-theft related filings. The agency is also working to prevent criminals from accessing tax-time financial products.

Identity theft

Combatting identity theft is on ongoing process as criminals continue to create new ways of stealing personal information and using it for their gain. Tax-related identity theft typically peaks early in the filing season. Criminals file bogus returns early so taxpayers remain unaware you have been victimized until they try to file a return and learn one already has been filed. Between 2011 and 2015, the IRS identified 19 million suspicious returns and prevented the issuance of some $60 billion in fraudulent refunds. During the 2015 filing season, the IRS detected and stopped more than 3.8 million suspicious returns.

However, criminals continue to probe for weaknesses. In May, the IRS discovered that criminals had breached its Get Transcript app. Return information of as many as 300,000 taxpayers may have been compromised, the IRS reported.

New protections

In March, the IRS began working with the return preparation community and the tax software industry to develop a coordinated response to tax-related identity theft. The stakeholders, the IRS reported, have focused on a number of areas including improved validation of the authenticity of taxpayers and information on returns, increased information sharing to improve refund fraud detection and expand prevention, as well as more sophisticated threat assessment and strategy development to prevent risks and threats.

One outgrowth of the process is the creation of new data elements that can be shared at the time of filing with the IRS to help authenticate a taxpayer's identity. The IRS explained that there are more than 20 new data components. They will be submitted with electronic return transmissions during the 2016 filing season. Some of the data elements are

• Reviewing the transmission of the tax return, including the improper and/or repetitive use of internet addresses from which the return is originating;
• Reviewing the time it takes to complete a tax return, so computer mechanized fraud can be detected.
• Capturing metadata in the computer transaction that will allow review for identity theft related fraud.

"We are taking new steps upfront to protect taxpayers at the time they file and beyond," IRS Commissioner John Koskinen said at a news conference in Washington, D.C. "Thanks to the cooperative efforts taking place between the industry, the states and the IRS, we will have new tools in place this January to protect taxpayers during the 2016 filing season."

Financial products

Previously, the IRS announced that it would limit the number of direct deposit refunds to a single financial account or pre-paid debit card to three. Fourth and subsequent valid refunds will convert to paper checks and be mailed to the taxpayer. The IRS emphasized that it will continue to bolster its efforts to curb tax-time financial product fraud.

If you have any questions about tax-related identity theft, please contact our office.

IR-2015-117, FS-2015-23

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

Despite the 16-day government shutdown in October, a number of important developments took place impacting the Patient Protection and Affordable Care Act, especially for individuals and businesses. The Small Business Health Option Program (SHOP) was temporarily delayed, Congress took a closer look at income verification for the Code Sec. 36B premium assistance tax credit, and held a hearing on the Affordable Care Act's employer mandate. Individuals trying to enroll in coverage through HealthCare.gov also experienced some technical problems in October.

SHOP

The Affordable Care Act created two vehicles to deliver health insurance: Marketplaces for individuals and the SHOP for small businesses. Marketplaces launched as scheduled on October 1 in every state and the District of Columbia. Qualified individuals can enroll in a Marketplace to obtain health insurance. Coverage through a Marketplace will begin January 1, 2014.

The October 1 start of SHOP, however, was delayed. Small employers may start the application process on October 1, 2013 but all functions of SHOP will not be available until November, the U.S. Department of Health and Human Services (HHS) reported. If employers and employees enroll by December 15, 2013, coverage will begin January 1, 2014, HHS explained.

SHOP is closely related to the Code Sec. 45R small employer health insurance tax credit. This tax credit is designed to help small employers offset the cost of providing health insurance to their employees. After 2013, small employers must participate in SHOP to take advantage of the Code Sec. 45R tax credit. For tax years beginning during or after 2014, the maximum Code Sec. 45R credit for an eligible small employer (other than a tax-exempt employer) is 50 percent of the employer's premium payments made on behalf of its employees under a qualifying arrangement for QHPs offered through a SHOP Marketplace. The maximum credit for tax-exempt employers for those years is 35 percent. Maximum and minimum credits are based upon the level of employee wages. If you have any questions about SHOP and the Code Sec. 45R credit, please contact our office.

Code Sec. 36B tax credit

Effective January 1, 2014, qualified individuals may be eligible for the Code Sec. 36B premium assistance tax credit to help pay for health coverage through a Marketplace. The credit is linked to household income in relation to the federal poverty line (FPL). Generally, taxpayers whose household income for the year is between 100 percent and 400 percent of the federal poverty line for their family size may be eligible for the credit.

When taxpayers apply for coverage in a Marketplace, the Marketplace will estimate the amount of the Code Sec. 36B credit that the taxpayer may be able to claim for the tax year. Based upon the estimate made by the Marketplace, the individual can decide if he or she wants to have all, some, or none of the estimated credit paid in advance directly to the insurance company to be applied to monthly premiums. Taxpayers who do not opt for advance payment may claim the credit when they file their federal income tax return for the year.

The October 16 agreement to reopen the federal government directed HHS to certify to Congress that Marketplaces verify eligibility for the Code Sec. 36B credit. HHS must submit a report to Congress by January 1, 2014 on the procedures for verifying eligibility for the credit and follow-up with a report by July 1, 2014 on the effectiveness of its income verification procedures.

Employer mandate

The Affordable Care Act generally requires an applicable large employer to make an assessable payment (a penalty) if the employer fails to offer minimum essential health coverage and a number of other requirements are not met. The employer mandate was scheduled to take effect January 1, 2014. However, the Obama administration delayed it for an additional year, to 2015.

In October, the House Small Business Committee heard testimony on the definition of full-time employee status for purposes of the employer mandate. An applicable large employer for purposes of the employer mandate is an employer that employs at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50. A full-time employee with respect to any month is an employee who is employed on average at least 30 hours of service per week.

Employers testifying before the GOP-chaired committee urged an increase in the 30-hour threshold. "Many small businesses simply cannot afford to provide coverage to employees who average 30 hours per week," the owner of a supermarket told the committee. "Business owners will have to make tough choices and many part-time employees will face reduced hours," he added. "Many franchise businesses are being turned upside down by the new costs, complexities and requirements of the law," another business owner told the committee.

Legislation (HR 2575) has been introduced in the House to repeal the 30-hour threshold for classification as a full-time equivalent employee for purposes of the employer mandate and to replace it with 40 hours. The bill has been referred to the House Ways and Means Committee.

HealthCare.gov

As has been widely reported, the individuals seeking to enroll in Marketplace coverage through HealthCare.gov experienced some online problems in October. The U.S. Department of Health and Human Services (HHS) has undertaken a comprehensive review of HealthCare.gov. In the meantime, HHS reminded individuals that in-person assistance centers are open as are customer call centers.

Enrollment

The Affordable Care Act generally requires individuals to carry health insurance after 2013 or make a shared responsibility payment (also known as a penalty). For 2014, the penalty is $95 or the flat fee of one percent of taxable income, $325 in 2015 or the flat fee of two percent of taxable income, $695 in 2016 or 2.5 percent of taxable income (the $695 amount is indexed for inflation after 2016).

Open enrollment in the Affordable Care Act's Marketplaces began October 1, 2013 and runs through March 31, 2014. The enrollment period overlaps with the January 1, 2014 requirement to carry health insurance or make a shared responsibility payment. On social media, the Obama administration clarified that individuals who enroll in coverage through a Marketplace at anytime during the enrollment period will not be responsible for a penalty.

If you have any questions about these developments or the Affordable Care Act in general, please contact our office.

The IRS has issued much-anticipated final "repair" regulations that provide guidance on the treatment of costs to acquire, produce or improve tangible property. These regulations take effect January 1, 2014. They affect virtually any business with tangible assets. The IRS has estimated that about 4 million businesses must comply.

The IRS has issued much-anticipated final "repair" regulations that provide guidance on the treatment of costs to acquire, produce or improve tangible property. These regulations take effect January 1, 2014. They affect virtually any business with tangible assets. The IRS has estimated that about 4 million businesses must comply.

At a length of over 200 pages, the regulations remain complex. Taxpayers will need to devote significant time and effort to study these regulations and to address their impact on their tax accounting. Taxpayers must decide whether they can deduct costs as repairs and maintenance or must capitalize the costs and recover their costs over a period of years. Every business, especially those with significant fixed assets, must develop an understanding of the regulations and their requirements.

Effective dates, decisions and opportunities

The final regulations retain the basic structure of the temporary and proposed regulations issued in December 2011 (the 2011 regulations). The IRS is not expected to delay these effective dates, since taxpayers were informed of the impending changes in many of the rules almost two years ago. Moreover, taxpayers will have the decision of whether to apply the regulations (either the temporary or the final) to the 2012 or 2013 tax years.

The IRS must provide additional guidance for taxpayers to change their methods of accounting to elect to apply either set of regulations retroactively and to comply with the 2014 effective date. Some accounting method changes will require taxpayers to make adjustments under Code Sec. 481(a), in effect, applying the regulations to past years and calculating the impact on income.

The final regulations make significant changes that can benefit most taxpayers if applied correctly. The changes include new and revised safe harbors, as well as new relief provisions for small business. The regulations will provide simplification and reduce controversy by allowing taxpayers to follow their financial accounting ("book") policies in some areas.

The IRS did not finalize every portion of the 2011 regulations. To address some problems with the temporary regulations on the disposition of depreciable property, the IRS issued new proposed regulations that ease the requirements for taxpayers to deduct the cost of building components that they replace.

Significant provisions in the final regulations include the following:

Materials and supplies - The threshold for deducting materials and supplies was increased from $100 to $200 and generally applies to items expected to be consumed in 12 months or less, or that have an economically useful life of 12 months or less.

De minimis safe harbor - The final regulations eliminate a controversial ceiling on the use of this safe harbor. Taxpayers with applicable financial statements can apply the safe harbor to an item that is $5,000 or less. The regulations extend the safe harbor to taxpayers without a financial statement, but only for property that costs $500 or less. Taxpayers must have written book policies in place at the beginning of the year to apply the safe harbor.

Routine maintenance and improvements - The final regulations retain controversial unit of property rules that apply the rules for real property to eight separate building systems. However, the rules do extend the routine maintenance safe harbor to real property and provide a new safe harbor for small taxpayers. The safe harbor for real property limits the period for recurring maintenance to 10 years, which many practitioners believe is too short.

Capitalization election - The final regulations allow taxpayers to capitalize repair and maintenance costs if these costs are capitalized for financial accounting purposes. This provides significant simplification over the temporary regulations, although the tax impact is contrary to what taxpayers normally want.

If you have any questions regarding the compliance obligations that your business now must face, and the opportunities that many of these new rules present, please do not hesitate to call this office.

The U.S. Supreme Court's decision in June to strike down Section 3 of the Defense of Marriage Act (DOMA) (E.S. Windsor, 2013-2 ustc ¶50,400) generated many questions about federal taxes and same-sex couples. The IRS has responded with a general rule recognizing same-sex marriages nationwide. The agency also promised that more guidance will be released before the start of the 2014 filing season.

The U.S. Supreme Court's decision in June to strike down Section 3 of the Defense of Marriage Act (DOMA) (E.S. Windsor, 2013-2 ustc ¶50,400) generated many questions about federal taxes and same-sex couples. The IRS has responded with a general rule recognizing same-sex marriages nationwide. The agency also promised that more guidance will be released before the start of the 2014 filing season.

Place of celebration approach

Section 3 of DOMA prevented the IRS (and all federal agencies) from recognizing same-sex married couples as married. After the Supreme Court struck down Section 3 of DOMA, the IRS had an important decision to make. The IRS could recognize all same-sex marriages regardless of where the couple resided. Alternatively, the IRS could only recognize the marriages of couples who reside in states that recognize same-sex marriage.

The IRS chose the first approach, which is known as "place of celebration" approach. All legally married same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes, regardless of whether a couple resides in a jurisdiction that recognizes same-sex marriage or in a jurisdiction that does not recognize same-sex marriage. This means that a couple who marry in a state (or other jurisdiction) that recognizes same-sex marriage and subsequently move to a state that does not recognize same-sex marriage will continue to be treated as married for all federal tax purposes.

The IRS had an important historical precedent that lead to its choosing place of celebration over place of residence. The IRS has taken a place of celebration approach to common law marriages for over 50 years.

Tax returns

For 2013 returns filed in 2014, legally married same-sex couples must file as married filing jointly or married filing separately. The rules for 2012 and prior years are not as simple.

The IRS imposed a deadline of September 16, 2013 for married same-sex couples, who had yet to file an original return for 2012, to file as single or as married. For 2011 and earlier, same-sex spouses who filed their tax returns timely may choose (but are not required) to amend their federal tax return filing status. They may amend their prior-year returns using either married filing separately or jointly filing status, provided the period of limitations for amending the return has not expired. If you have any questions about filing an amended return, please contact our office.

Employee benefits

Because of DOMA, taxpayers may have paid taxes on the fair market value of employer-provided health care coverage for their same-sex spouse. The IRS will allow the employee to file an amended return for open tax years reflecting his or her status as a married individual to recover federal income tax paid on the value of health coverage of the employee's spouse. The IRS also instructed certain sponsors of some employee benefit plans to treat same-sex spouses as spouses.

Employment taxes

The IRS has provided two optional alternative special administrative procedures for employers to use to correct overpayments of employment taxes. Under the first alternative, employers may use the fourth quarter 2013 Form 941, Employer's Quarterly Federal Tax Return, to correct these overpayments of employment taxes for the first three quarters of 2013. Under the second alternative, employers may file one Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, for the fourth quarter of 2013 to correct these overpayments of FICA taxes for all quarters of 2013. Please contact our office for more details about these optional procedures.

Domestic partners

There is one very important distinction that the IRS has made in its guidance for same-sex couples. The IRS is not recognizing registered domestic partners, individuals in a civil union, or similar relationships as married. Registered domestic partners may not file as married filing jointly or married filing separately because the individuals are not married or spouses for federal tax purposes

Looking ahead

The IRS will likely begin accepting 2013 returns for processing in mid- to late January 2014. Some same-sex couples may find their filing more complicated despite the demise of DOMA. States that do not recognize same-sex marriage will presumably not allow these couples to file their state returns (if required) as married. The IRS is also expected to issue more guidance on particular areas of the tax law, such as estate and gift taxes, retirement plans and more. Our office will keep you posted of developments.

Please contact our office if you have any questions about the IRS's guidance for same-sex couples.