Issue Number 10

CCHGroup.com

March 6, 2014

Inside this Issue

Tax Reform Proposals From White House, Congress..................... 109 2014 Ination-Adjusted Vehicle Depreciation Dollar Limits Released................................. 110 Additional Transition Rules For Accounting Changes Under MACRS/GAA Repair Regs............ 111 IRS Issues Final Regs On Forfeiture Under Code Sec. 83......... 111 IRS Issues Final Form 8960, NII Tax, Instructions......................... 112 Tax Court Nixes Noncustodial Parents Claim For Dependency Deduction ................. 113 Tax Court Denies Capital Gain Treatment For Qui Tam Award.......... 113 CRS Highlights Itemized Deductions Across Income Groups...................... 114 IRS Updates Filing Season Statistics............................... 114 Partnerships Transfer Of State Tax Credits Was A Disguised Sale........... 115 Tax Briefs.......................................... 115 OPR Reports Increase In Number Of Cases.............................. 116 Practitioners Corner: IRS Preps For Affordable Care Acts Individual Mandate................. 117 Washington Report............................ 118 Compliance Calendar....................... 120

Tax Reform Proposals Released From White House, Congress; Next Steps Uncertain
FY 2015 Budget Proposals, Tax Reform Act of 2014 hortly before President Obama unveiled his proposed scal year (FY) 2015 federal budget on March 4, House Ways and Means Chair Dave Camp, R-Mich., introduced a sweeping tax reform bill. While President Obama did not call for such a mammoth overhaul of the Tax Code as Camp did, the President did include many tax proposals in his budget, affecting individuals, businesses and tax administration. CCH Take Away. All the tax reform proposals keep the conversation moving forward, Don Susswein, principal, Washington National Tax Ofce, McGladrey, told CCH. In Camps bill, two greatly affected groups are taxpayers in high-tax states, who would be impacted by elimination of the deduction for state and local taxes, and corporations, which would benet from a corporate tax cut, but one that would be partially paid for by higher taxes on small and midsize businesses that are generally structured as pass-through entities, Susswein observed. Comment. Both the President and Camp quickly took to social media to promote their proposals. At a news conference, House Speaker John Boehner, R-Ohio, indicated it was unlikely Camps bill would come before the House for a vote. GOP support for many

of the Presidents proposals remains even less likely before midterm elections.

Obamas proposals
As in past budgets, President Obama proposed tax incentives for manufacturing, research, energy, and job creation. The President called for Congress to make permanent the research tax credit and expand incentives for employers to hire veterans. Carried interest would taxed as ordinary income and payroll taxes would be extended to cover distributions from certain pass-through entities engaged in a professional service business. President Obama signaled a willingness to reduce the corporate tax rate but would require the elimination of some business incentives, particularly tax preferences for fossil fuels, in exchange. The President also proposed a number of international and insurance taxation reforms. For individuals, President Obama proposed to enhance the earned income credit (EIC) for individuals without children and noncustodial parents, and make permanent the American Opportunity Tax Credit. The President also proposed to reduce the value of certain tax expenditures for higher income individuals.

Camps bill
Camps bill would replace the current seven individual income tax rate brackets (10, 15, 25, 28, 33, 35, and 39.6 percent) with three rates: 10, 25 and 35 percent. In Continued on page 110

Route to:

110 March 6, 2014

IRS Issues 2014 Inflation-Adjusted Vehicle Depreciation Dollar Limits

Rev. Proc. 2014-21 he IRS has released the inflationadjusted limitations on depreciation deductions for business-use passenger automobiles, light trucks, and vans first placed in service during calendar year 2014. The depreciation limits for passenger vehicles are identical to the limits for 2013 (apart from the first year limit, which no longer includes first-year bonus depreciation). The depreciation limits on trucks and vans have increased by $100 for each of the first three years. CCH Take Away. Congress has not extended bonus depreciation to the 2014 tax year in the case of passenger vehicles. This means that although several of the limits have been adjusted upward for ination, the total amount a taxpayer may deduct for a vehicle placed in service during 2014 is effectively $8,000 lower than for a vehicle placed in service during 2013, unless Congress provides retroactive relief this year. Comment. CCH, a part of Wolters Kluwer, correctly projected the 2014 depreciation base-amount limits on automobiles, trucks and

vans rst put into use in 2014. See the November 27, 2013 issue of this newsletter for details.

Background
Code Sec. 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the vehicle in service in its business, and for each succeeding year. Under Code Sec. 280F(d)(7), the IRS adjusts for ination the amounts allowable for depreciation deductions. In Rev. Proc. 2014-21, the IRS has provided depreciation limits for passenger automobiles, light trucks and vans.

$3,460 for the rst tax year; $5,500 for the second tax year; $3,350 for the third tax year; and $1,975 for each succeeding tax year. Comment. Sport Utility Vehicles (SUVs) and pickup trucks with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds continue to be exempt from the luxury vehicle depreciation caps based on a loophole in the operative denition. Congress in 2004 placed a $25,000 limit on Code Sec. 179 expensing of heavy SUVs but has not extended it to Code Sec. 280F.

Passenger automobiles
The maximum depreciation limits under Code Sec. 280F for passenger automobiles rst placed in service during the 2014 calendar year are: $3,160 for the rst tax year; $5,100 for the second tax year; $3,050 for the third tax year; and $1,875 for each succeeding tax year.

Leases
Lease payments for vehicles used for business or investment purposes are deductible in proportion to the vehicles business use. However, lessees must include a certain amount in income during the year that the vehicle is leased, to partially offset the amounts by the lease payments exceed the luxury automobile limits. Rev. Proc. 201421 includes tables that identify the income inclusion amounts for passenger automobiles, trucks and vans with lease terms that begin in calendar year 2014.
References: FED 46,274; TRC DEPR: 3,504.05.

Trucks and vans

The maximum depreciation limits under Code Sec. 280F for trucks and vans rst placed in service during the 2014 calendar year are:

Tax Proposals

Continued from page 109 addition, many incentives for individuals would be repealed, including the state and local tax deduction, the itemized deduction for medical expenses, the adoption credit, deduction for alimony payments, the deduction for higher education tuition,

and residential energy credits. A few incentives would be enhanced, such as the child tax credit. Comment. Two popular individual incentivesthe home mortgage interest deduction and the charitable contribution deductionwould survive under Camps plan but in modied form.

Reference Key
FEDERAL TAX WEEKLY, 2014 No. 10. FEDERAL TAX WEEKLY is also published as part of CCH Tax Research Consultant by CCH, a part of Wolters Kluwer, 4025 W. Peterson Avenue, Chicago, IL 60646-6085. Editorial and Publication Ofce, 1015 15th St., NW, Washington, DC 20005. 2014 CCH Incorporated. All Rights Reserved. FED references are to Standard Federal Tax Reporter USTC references are to U.S. Tax Cases CCH Dec references are to Tax Court Reports TRC references are to Tax Research Consultant

Camps bill would gradually reduce the corporate tax rate to 25 percent. Few targeted business tax incentives would survive. Camps plan eliminates the Work Opportunity Tax Credit, many energyrelated incentives, the rules for like-kind exchanges, and more. However, Code Sec. 179 small business expensing would be enhanced. The research tax credit would be retained but modied. On the international front, under the Camp bill, the current treatment of taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when the earnings are distributed would be replaced with a dividend-exemption system. Camps bill also modies the foreign tax credit system. Issue 10

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IRS Provides Additional Transition Rules For Accounting Method Changes Under MACRS/GAA Repair Regs
Rev. Proc. 2014-17 he IRS has issued revised procedures providing automatic consent to taxpayers to change their accounting methods under 2011 temporary regs (TD 9564) and 2013 proposed regs (NPRM REG-110732-13) on the disposition of tangible property. Rev. Proc. 201417 modifies and supersedes Rev. Proc. 2012-20, effective February 28, 2014. CCH Take Away. Rev. Proc. 2014-17 applies to changes under the temporary and proposed regulations, but only for taxpayers who apply those regulations for 2012 or 2013, Sara Logan, director, Washington National Tax Services, PricewaterhouseCoopers LLP, told CCH. The nal disposition regulations, when issued, will be retroactive to January 1, 2014, Logan said. Comment. The IRS will issue revised procedures after it issues the nal disposition regulations; these will be simpler, George Manousos, partner, PricewaterhouseCoopers, told CCH. The IRS may also need to issue procedures for making 2012 changes, because the deadline for timely ling a Form 3115 for 2012 changes has passed, Manousos said.

Change of method
The 2013 nal regs apply to the depreciation or amortization of leasehold improvements and to property depreciated under Code Sec. 168. The proposed disposition regs, when nalized, will modify the rules for general asset accounts and will provide rules for partial dispositions of MACRS (modied accelerated cost recovery system) property. Rev. Proc. 2014-17 applies to changes of any of these methods. Taxpayers request a change of accounting method on Form 3115. Taxpayers that want to change their accounting for leasehold improvements can make the change for multiple assets on a single Form 3115, and can provide a single net Code Sec. 481(a) adjustment, or may provide a single positive adjustment and a single negative adjustment, for all the changes. Smaller taxpayers, with average annual gross receipts of $10 million or less may submit a streamlined Form 3115.

GAA and partial disposition elections

The temporary regs and Rev. Proc. 201220 allowed taxpayers to make late general asset account (GAA) elections or late elections out of a GAA by ling a Form 3115. Rev. Proc. 2014-17 similarly treats the late GAA election as a change of accounting method for a limited period of time (20122013) and also allows taxpayers to undo GAA elections made under the temporary

General rules
The 2011 temporary regs applied to the treatment of capitalized amounts when the taxpayer disposed of the property. In 2013, the IRS reproposed the regs on the disposition of tangible property. Taxpayers now have a choice to apply the temporary or proposed regs or to maintain their existing accounting practices for 2012 and 2013. Comment. Rev. Proc. 2014-17 provides that the normal scope limitations that would prevent an automatic change (such as having changed the same item within the past ve years, being under audit, or being in the last year of a trade or business) will not apply under Rev. Proc. 2014-17, Logan said.

regs by ling a Form 3115. Rev. Proc. 2014-17 also permits taxpayers to make a late partial disposition election by ling a Form 3115. Normally, a positive Code Sec. 481(a) adjustment can be spread over four years. Rev. Proc. 2014-17 requires that some adjustments, such as those from revoking a general asset account election, be included entirely in one year. Comment. A partial disposition election can accomplish the same result as a general asset account election, but is a simpler procedure, Manousos said. Many taxpayers will revoke their GAA election because of the administrate ease of the new rules. Comment. Under current law, taxpayers cannot write off the cost of property until it is fully disposed of, Logan said. The proposed partial disposition election allows taxpayers to write off the cost of a disposed property component (such as a building roof), she said. If such disposed property was included in a GAA via a retroactive GAA method change led for the 2012 or 2013 year, then the taxpayer must include any Code Sec. 481 adjustment in one year under the provisions of Rev. Proc. 2014-17.
References: FED 46,277; TRC DEPR: 3,559.

Final Regs Decline To Expand Substantial Risk Of Forfeiture Under Code Sec. 83
TD 9659 he IRS issued nal regs to clarify the meaning of a substantial risk of forfeiture (SRF) under Code Sec. 83. Despite comments expressing concern about the impact of the regs, the government claimed that the nal regs did not narrow the circumstances treated as a SRF.

CCH Take Away. Property under Code Sec. 83 vests when it is no longer subject to an SRF. Thus, taxation of the property is deferred if it is subject to an SRF. Treasury and the IRS generally have limited the application of an SRF to cirContinued on page 112

2014 CCH Incorporated. All Rights Reserved.

112 March 6, 2014

IRS Issues Final Instructions To Form 8960, Net Investment Income Tax, For 2013 Filers
Form 8960, Net Investment Income Tax, Final Instructions he IRS has issued nal instructions for Form 8960, Net Investment Income TaxIndividuals, Estates and Trusts, for tax year 2013. The instructions are similar to the draft instructions but do include some useful changes. CCH Take Away. The IRS seems to have conned the changes to those it considered now either essential or helpful to preparers of 2013 tax returns, Michael J. Grace, JD, Whiteford Taylor & Preston LLP, Washington, D.C., told CCH. That strikes me as an intelligently incremental approach because preparers are fully occupied working on returns for the 2013 tax year, the rst year in which their clients may be subject to the NII Tax. The instructions likely will evolve and

be further rened as preparers and the IRS increasingly familiarize themselves with the NII tax.

Final instructions
The IRS has now issued final instructions for Form 8960 for 2013. The final instructions are slightly longer and add various notes, tips and cautions. They also clarify and expand some discussions, such as the safe harbor for real estate professionals; the elections under Reg. 1.1411-10(g); income from annuities; and the treatment of capital loss carryovers on the Net Gains and Losses Worksheet. The nal regs maintain a reference to the 2013 proposed regs on adjusting capital loss carryforwards and retain the discussion on calculating net operating losses that can be deducted when computing the NII tax. Like the draft regs, the nal regs do not provide additional guidance for determining whether an activity is a trade or business.
Reference: TRC INDIV: 69,150.

NII tax developments

The net investment income (NII) tax rst took effect for 2013. The IRS issued nal regs (TD 9644) on the NII tax in December 2013. At the same time, the IRS issued new proposed reliance regs (NPRM REG130843-13) on the calculation of the adjustment to NII gain or loss from the sale of a partnership or S corp interest. The IRS released a draft version of Form 8960 in August 2013: a single page with 21 lines. In early January 2014, the IRS issued draft instructions, based on the nal and proposed reliance regs. The draft instructions were 19 pages long, including several worksheets. In late January 2014, the IRS issued the nal Form 8960; there were no changes from the draft form.

Forfeiture

Continued from page 111 cumstances described in the statute and the legislative history.

Background
Under Code Sec. 83, the value of property (less any amount paid) transferred in connection with the performance of services is included in the employees income when the property is not subject to an SRF. Code Sec. 83(c)(1) provides that property is subject to an SRF if the recipients rights to full enjoyment of the property are conditioned on the future performance of substantial services. The regs also treat a condition related to the purpose of the transfer as an SRF, where the possibility of forfeiting the property is substantial if the condition is not satised.

Final regs
The nal regs clarify that: Except as specifically provided in the Code and regs, an SRF may be

established only through a requirement to perform substantial services or through a condition related to the purpose of the transfer; Whether a condition related to the purpose of the transfer is an SRF depends upon the likelihood that the forfeiture event will occur and the likelihood that the forfeiture will be enforced; and A transfer restriction, such as certain restrictions in the Securities and Exchange Act of 1934 (Exchange Act), is not an SRF unless specifically described in the Code and regs. Comment. Thus, property is not subject to an SRF if, at the time of transfer, the facts and circumstances demonstrate that the forfeiture is unlikely to be enforced.

Proposals rejected
A right to receive property in the future is not a transfer of property under Code

Sec. 83. Therefore, an involuntary separation from service without cause is not an SRF if property is not transferred until after the separation from service. Comment. However, the acceleration of vesting upon an involuntary separation without cause (or upon death or disability) does not nullify the treatment of a substantial services requirement as an SRF. The Tax Code and regs treat, as an SRF, a requirement to disgorge profits from a sale of stock within six months of the purchase of the property, as imposed by Section 16(b) of the Exchange Act. However, the purchase of shares in a transaction subject to Section 16(b), followed by the exercise of a stock option that is not subject to Section 16(b), does not defer taxation of gain from the stock option exercise. A revised example clarifies this conclusion.
References: FED 47,015; TRC COMPEN: 18,202.

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Court Order Insufficient To Support Noncustodial Parents Claim For Dependency Deduction
Swint, 142 TC No. 6 declaration in a court order was insufcient to support a taxpayers claim to the dependency exemption deduction for his noncustodial child, the Tax Court has found. The declaration was unsigned and did not unconditionally provide that the custodial parent will not claim the child. CCH Take Away. A custodial parent generally must sign a written declaration that he or she will not claim the child as a dependent. The custodial parent may use Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a statement conforming to the substance of Form 8332.

tion deduction and a child tax credit on his 2009 return, which the IRS disallowed.

Courts analysis
The court rst noted that under Reg. 1.1524(e)(1)(ii), for tax years starting after July 2, 2008, a court order or decree or a separation agreement may not serve as a written declaration for purposes of releasing the dependency exemption deduction by the custodial parent. However, Reg. 1.152-4(e) (5) provides a carve out to this rule. If a written declaration was executed in a tax year beginning on or before July 2, 2008, the IRS looks to the requirements for the form of a written declaration in effect at the time the written declaration was executed. Here, the court found that there was no prohibition in 1998 on using a court order or decree or a separation agreement as a written declaration if the other requirements for a written declaration were met. However, the declaration in the court order in this case failed to satisfy the signature requirement. Code Sec. 152(e)(2)(A) requires that the custodial parent sign a written declaration releasing the dependency exemption for his or her child to the noncustodial parent. A state court order,

Background
Under a declaration that was part of a state court order from 1998, the taxpayer would be entitled to the dependency exemption deduction and a child tax credit for the child as long as he remained current in his child support organization. However, neither the taxpayer nor his former spouse signed the declaration. The taxpayer claimed a dependency exemp-

unsigned by the custodial parent, does not meet this requirement, the court held. Additionally, the taxpayers claim to the dependency deduction was contingent on his timely payment of child support. The court found that the declaration in the court order was conditional and insufcient. The court noted that in 1984 Congress removed the requirement for the noncustodial parent to pay child support in excess of certain thresholds. Instead, Congress required that the custodial parent sign a written declaration that he or she will not claim the child as a dependent. This change removed the evidentiary disputes that the court had to resolve in determining which parent could claim the deduction. If the dependency exemption deduction was permitted to be released upon the satisfaction of a conditional declaration, the court would have to revert to resolving evidentiary disputes. As a result, the court concluded that the IRS was correct in denying the dependency exemption deduction. Comment. The court also found that the husband was not entitled to the child tax credit.
References: CCH Dec. 59,835; TRC FILEIND: 6,168.20.

Tax Court Denies Capital Gain Treatment For Qui Tam Award
Patrick, 142 TC No. 5 he Tax Court has rejected a taxpayers treatment of a qui tam award as capital gain. The court concluded that the award was a reward for advancing a claim on behalf of the government, and was not a sale or disposition of property. CCH Take Away. Under the False Claims Act and other statutes, a person, known as a relator, can le a complaint (known as a qui tam action) and seek reimbursement on the governments behalf. A court may award 15 to 30 percent of the amount recovered to the relator. The taxpayer here led and prosecuted several successful claims, but did

not want to treat the award as ordinary income. The court found as key the rule that the relator must serve the complaint and supporting information on the government.

Background
The taxpayer worked for a company that designed medical equipment. Although the equipment could be used on an outpatient basis, the company marketed its use as inpatient, so that a hospital stay was necessary. Some of the hospital expense was billed to Medicare. The taxpayer collected documents that demonstrated the companys practices. He led a qui tam complaint, which the com2014 CCH Incorporated. All Rights Reserved.

pany settled for $75 million. The taxpayer then led additional complaints that were settled for cash. The taxpayer received $6 million for 2008 and $850,000 for 2009. The government issued Forms 1099-MISC to the taxpayer to report those amounts. The taxpayer reported the amounts (less attorneys fees) as capital gain.

Courts analysis
The court stated that to be a capital gain, the award must have resulted from the sale or exchange of a capital asset. The court concluded there was no sale or exchange and no capital asset. Continued on page 114

114 March 6, 2014

CRS Highlights Value Of Itemized Deductions Across Income Groups

CRS 7-5700 he Congressional Research Service (CRS) recently conducted a review of who claims itemized deductions and the revenue loss from certain itemized deductions. The top ve itemized deductions are projected to reduce federal revenues by more than $208 billion for scal year (FY) 2014. CCH Take Away. President Obama has proposed to reduce the value of certain tax expenditures for higher income taxpayers. Rep. Dave Camp, R-Mich., chair of the House Ways & Means Committee, has proposed cutting back on most itemized deductions in favor of an overall lower tax rate. Under Camps plan, many popular itemized deductions would be eliminated. The home mortgage interest deduction and the deduction for charitable contributions would be retained but modified under Camps proposal.

(see lead article in this issue for more details).

Income groups
CRS reported that in 2011, the most recent year for which statistics are available, 32 percent of all lers chose to itemize their deductions rather than claim the standard deduction. Higher income individuals itemize their deductions more often than lower income taxpayers. The share of lers who chose to itemize in higher income ranges above $200,000 remained virtually the same, although the average sum of itemized deductions increased, CRS reported. For taxpayers with an AGI above $200,000, the share that itemized ranged from 94 percent to 98 percent, and the average sum of itemized deductions claimed per itemizer ranged from $39,470 to $441,719. Comment. In comparison, CRS discovered that 84 percent of tax lers with an AGI between $100,000 and $200,000 chose to itemize their deductions, with an average of $27,075 in deductions claimed.

CRS reported. Higher income taxpayers claimed deductions for gifts to charitable organizations, state and local taxes and real property taxes at higher rates than lower income taxpayers. Eighty-eight percent of filers with AGI above $200,000 claimed a deduction for charitable contributions, compared to 75 percent of taxpayers with AGI between $100,000 and $200,000 and 45 percent of taxpayers with AGI between $50,000 and $100,000.

Revenue losses
CRS, using gures calculated by the Joint Committee on Taxation, examined losses in revenue from selected deductions. The home mortgage interest deduction is expected to account for the largest loss in revenue, forecasted at $71.7 billion for FY 2014. The deduction for state and local taxes is projected to amount to $51.8 billion for FY 2014, the deduction for charitable gifts is projected to reach $43.6 billion for FY 2014, the deduction for real property taxes is projected to total $28.6 billion for FY 2014, and the deduction for medical expenses is projected to reach $12.4 billion.
Reference: TRC INDIV: 48,050.

Qui Tam

Deductions
Filers in different income ranges tend to claim different itemized deductions,

Continued from page 113 The taxpayer claimed that he sold the information to the government. The court found that since the relator is statutorily obligated to provide all supporting information, there is no sale or exchange. The government does not purchase information; it permits the relator to advance a claim on its behalf. The taxpayer also claimed that the right to future income is a capital asset, or that the documents and information provided were capital assets. Under P.G. Lake, SCt, 58-1 ustc 9428, the right to future payments of ordinary income is not a capital asset. The award was a reward for the taxpayers actions. The documents and information were not a capital asset because the taxpayer did not have a legal right to exclude others from using them. Thus, the taxpayer did not transfer any rights to the government.
References: CCH Dec. 59,834; TRC SALES: 15,100.

Filing Season Update: 49.6 Million Individual Income Tax Returns Filed So Far
The IRS has announced that it has processed almost 98 percent of the 49.6 million individual income tax returns that it has received so far this ling season. That number is approximately one-third of the individual income tax returns it expects to receive during 2014. Previously, the IRS predicted that more than 148 million individual tax returns will be led in 2014. E-ling. More taxpayers are ling their returns electronically, the IRS reported. Of the total number of returns led to date, 94 percent (or 46.6 million) have been e-led. Approximately 22 million returns were e-led from home computers, representing an increase of seven percent compared to the same time last year. Refunds. The IRS also reported that it has issued more than 40 million refunds this ling season. This represents an increase of more than six percent compared to the same time in 2013. Nearly 90 percent of refunds have been directly deposited into taxpayer accounts. The average refund this ling season is $3,116. The average refund for taxpayers whose refunds are directly deposited is slightly higher, at $3,155, the IRS reported. IR-2014-20, TRC FILEIND: 15,250.

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Partnerships Transfer Of State Tax Credits Was A Disguised Sale

Route 231, LLC, TC Memo. 2014-30 he Tax Court has found that the transfer of state tax credits (for charitable donations of conservation easements) from one LLC in exchange for money from its one-percent partner, an LLP, was a disguised sale under Code Sec. 707 resulting in income to the LLC. The Tax Court found that the credits were property for purposes of Code Sec. 707(a)(2)(B). CCH Take Away. Unlike Historic Boardwalk Hall, CA-3, 2012-2 USTC 50,538, in which the Third Circuit denied rehabilitation tax credits to an investor who was found not to be a bona de partner, the Tax Court did not question the validity of the partnership between the LLC and LLP. Instead it closely applied the Fourth Circuits analysis from Va. Historic Tax Credit Fund 2001 LP, 2011-1 USTC

50,308, in which the court found there had been taxable transfers of historic rehabilitation tax credits, which were property under the disguised sale rules.

Courts analysis
The transfer of money for tax credits was not a capital contribution, but a disguised sale under Code Sec. 707, the Tax Court found. The tax credits met the denition of property under the Code Sec. 707(a)(2) (B) disguised sale denition because they were valuable and imbued with essential property rights, such as transferability. The amount of money transferred by the LLP to the LLC was expressly linked to the amount of tax credits it received, and the transfer of credits would not have taken place but for the transfer of money. The LLP failed to undertake any entrepreneurial risks to receive the credits. Furthermore, a facts-and-circumstances test conrmed that the transfer of credits in exchange for money was a disguised sale, the Tax Court found.
References: CCH Dec. 59,836(M); TRC PART: 27,058.

Background
An LLC taxed as a partnership donated two conservation easements and one fee interest on historic tracts of land to charitable conservation agencies and claimed transferable state income tax credits equal to 50 percent of the fair market value of the donated land. An LLP acquired some of the state tax credits and a one-percent partnership interest in exchange for what the two entities termed a capital contribution of approximately $0.53 for each dollar of state tax credits allocated to the LLCs fund. However, the IRS issued a nal partnership administrative adjustment determining that the LLC had failed to report $3.8 million from the sale of the state tax credits.

Internal Revenue Service The IRS has released guidance with respect to the computation of the housing cost/income ratio by issuers of qualied mortgage bonds (QMBs) and mortgage credit certicates (MCCs). State and local governments can issue QMBs and MCCs under Code Sec. 143(a) and Code Sec. 25(c)(1), with recipients subject to the income requirements of Code Sec. 143(f), expressed as a ratio of nancing to median gross income.
Rev. Proc. 2014-23, FED 46,278; TRC SALES: 51,360.

certain U.S. source income paid to foreign persons, information reporting and backup withholding with respect to payments made to certain U.S. persons, portfolio interest treatment for nonresident alien individuals and foreign corporations, and requirements for certain claims for refund or credit of income tax made by foreign persons.
NPRM REG-130967-13, FED 49,611; NPRM REG-134361-12, FED 49,612; TRC FILEBUS: 9,108.

courts rules to be construed to secure a just determination in every case and the timing of the IRSs enforcement efforts effectively closed off all other venues to the USVI.
Huff, CA-11, 2014-1 USTC 50,186; TRC LITIG: 6,180.

International The IRS has issued nal versions of previously released temporary regulations (T.D. 9657 and T.D. 9658) and proposed regulations (see the February 27, 2014 issue of this newsletter) that revise certain provisions of the nal regulations regarding withholding of tax on

The Tax Court should have allowed the U.S. Virgin Islands (USVI) to intervene as a matter of right under FRCP 24(a)(2) in three consolidated cases brought by taxpayers claiming to be bona de residents of the USVI in response to IRS deciency notices. Although the Tax Courts rules only provide for intervention as a matter of right in a few specic situations that did not apply, Tax Court Rule 1(d) required the
2014 CCH Incorporated. All Rights Reserved.

Income A legally separated wife, who led a separate return for the year at issue, was required to report on her return one-half of the income generated by her husbands community property investment. Under California law, even though she did not know about the investment until years later, the wife had a present and existing interest in the husbands hedge fund, which he funded with community property.
Carrino, TC, CCH Dec. 59,840(M), FED 47,956(M); TRC INDIV: 24,150.

Continued on page 116

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Tax Briefs

Continued from page 115

Deductions An individual was not in the trade or business of trading securities. Rather, his trading was sporadic and covered only a portion of the year. Finally, he failed to establish that he sought to prot from swings in the daily market by showing how long he held many of the shares that he traded. Therefore, his losses were capital losses and were limited to the amount of capital gains plus $3,000.
Assaderaghi, TC, CCH Dec. 59,839(M), FED 47,955(M); TRC SALES: 45,058.

otherwise promote the plan after learning it was the object of an IRS investigation or that he repeatedly engaged in other prohibited conduct unrelated to the plan.
Baisden, DC Calif., 2014-1 USTC 50,187; TRC PENALTY: 3,256.20.

housing credit. The new guidance extends the provisions of Notice 2012-18 through December 31, 2014.
Notice 2014-15, FED 46,276; TRC BUSEXP: 54,220.30.

Deciencies and Penalties The applicability of the gross valuation misstatement penalty was remanded to the district court for further proceedings in light of the Supreme Courts decision in Woods, SCt, 2013-2 USTC 50,604.
Nevada Partners Fund, L.L.C., CA-5, 2014-1 USTC 50,191; TRC PENALTY: 3,110.25.

Frivolous Arguments An individual who advanced a series of frivolous, tax protestor-type arguments was sanctioned for instituting proceedings for purposes of delay under Code Sec. 6673. The taxpayer had declared zero income despite receiving wages from several employers. All of the taxpayers arguments have been repeatedly rejected by the courts.
Waltner, TC, CCH Dec. 59,841(M), FED 47,957(M); TRC LITIG: 6,816.

Bankruptcy A Chapter 13 debtor was a responsible person who willfully failed to remit a businesss withholding taxes; therefore, his objection to the IRSs proof of claim was denied. The debtor acted willfully because he was aware that the payroll tax deposits were not being paid when he signed the payroll tax returns and paid other creditors.
In re Ingram, BC-DC Tex., 2014-1 USTC 50,189; TRC PAYROLL: 6,306.05.

Return Preparers A disbarred certified public accountant (CPA) was permanently enjoined from promoting his abusive tax-avoidance scheme and engaging in any other activity subject to penalty pursuant to Code Sec. 6700. However, the CPA was not permanently enjoined from preparing federal tax returns for others. There was no evidence to show that he continued to actively use, market or otherwise promote the plan after learning it was the object of an IRS investigation or that he repeatedly engaged in other prohibited conduct unrelated to the plan.
Baisden, DC Calif., 2014-1 USTC 50,187; TRC PENALTY: 3,256.20.

Liens and Levies A judgment creditor had priority over an IRS tax lien because the IRS failed to le the notice required under Code Sec. 6323. A federal tax lien is not effective against third parties until after the IRS has properly led a notice of federal tax lien and there was no evidence of a federal tax lien notice in the record.
Clinton v. Adams, CA-9, 2014-1 USTC 50,190; TRC IRS: 48,150.20.

Tax Credits The IRS has extended the Physical Inspections Pilot Program for participating states, which is an alternative method, announced in Notice 2012-18, I.R.B. 2012-10, 438, to satisfy certain physical inspection and certication review requirements under Reg. 1.42-5(c)(2) for the low-income

Employee Benet Plans The IRS did not abuse its discretion in disqualifying an Employee Stock Ownership Plan (ESOP) sponsored by an LLC taxed as a partnership. The plan did not qualify as an ESOP or comply with the written plan document because the plan did not invest in employer securities. Employer securities means corporate stock, not interests in an entity taxed as a partnership.
K.H. Company, LLC Stock Ownership Plan, TC, CCH Dec. 59,837(M), FED 47,953(M); TRC RETIRE: 75,102.

The IRS did not abuse its discretion in sustaining a levy and declining to consider an individuals installment agreement.
Lyons, TC, CCH Dec. 59,838(M), FED 47,954(M); TRC IRS: 51,054.35.

IRS Ofce Of Professional Responsibility Reports Increase In Number Of Cases

The IRS Ofce of Professional Responsibility (OPR) recently reported an uptick in the number of cases of alleged misconduct by practitioners. OPR received 784 cases for potential discipline in calendar year 2013 compared to 516 cases in 2012. Background. Within the IRS, OPR is responsible for interpreting and applying Circular 230 (rules of practice before the agency). OPR oversees practitioner conduct and discipline. OPR may direct that a practitioner be reprimanded, suspended or disbarred, among other sanctions. In certain cases, referrals of practitioner misconduct are mandatory to OPR. Cases. Of the 784 cases for potential discipline that OPR considered in 2013, 11 resulted in disbarments, the IRS reported. In 2013, OPR issued 128 reprimands and 48 expedited suspensions. In 2012, OPR issued two disbarments, 150 reprimands and 61 expedited suspensions. www.irs.gov; TRC IRS: 3,112.

A disbarred certified public accountant (CPA) was permanently enjoined from promoting his abusive tax-avoidance scheme and engaging in any other activity subject to penalty pursuant to Code Sec. 6700. However, the CPA was not permanently enjoined from preparing federal tax returns for others. There was no evidence to show that he continued to actively use, market or Federal Tax Weekly

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IRS Preps For Impact Of Affordable Care Acts Individual Shared Responsibility Requirement

uring his rst appearance before Congress, new IRS Commissioner John Koskinen told lawmakers that the agencys implementation of the Patient Protection and Affordable Care Act is on track as 2014 unfolds. Koskinen, who appeared before a House Ways and Means subcommittee in February, said that oversight of the Affordable Care Acts individual shared responsibility provision will have a profound impact starting with the 2015 ling season and will require additional taxpayer service and education activities. Preparations are well underway, Koskinen emphasized. Beginning January 1, 2014, qualied individuals must carry minimum essential health insurance or make a shared responsibility payment when they le their 2015 returns. When asked by lawmakers how the IRS intends to enforce the individual shared responsibility payment, Koskinen acknowledged that options are limited by the Affordable Care Act. Comment. The individual mandate is just unfolding, Elizabeth Kidd, CPA, who serves on the state council of the Pennsylvania Institute of Certified Public Accountants (PICPA), told CCH. The requirement that an individual, unless exempt, has minimum essential coverage began January 1, 2014 and the number of individuals who will be liable for a shared responsibility payment will not be known until 2014 returns are led in 2015. It is unclear at this time if failures to make individual shared responsibility payments will rise to the levels of unpaid child support and unpaid student loans, Kidd observed. Comment. The IRS recently posted health care tax tips on its

website to remind taxpayers about the requirement to carry minimum essential health insurance coverage, unless exempt. The IRS also noted that individuals and their dependents covered by employerprovided plans generally meet the requirements for minimum essential coverage.

the minimum threshold for filing a tax return, incarcerated individuals, persons not lawfully present in the U.S., members of health sharing ministries, and individuals having a hardship which makes them unable to obtain coverage. In Notice 2014-10 and NPRM REG141036-13 issued in January 2014, the IRS provided clarifications on certain

When asked by lawmakers how the IRS intends to enforce the individual shared responsibility payment, IRS Commissioner John Koskinen acknowledged that options are limited by the Affordable Care Act.
Individual mandate
The Affordable Care Acts individual mandate took effect January 1, 2014. Generally, individuals with employer-sponsored coverage (including COBRA coverage and retiree coverage) are treated as carrying minimum essential coverage. Individuals covered by Medicare, Medicaid, Children's Health Insurance Program (CHIP) coverage, coverage administered by the U.S. Department of Veterans Affairs and coverage provided by the U.S. Department of Defense are also treated as carrying minimum essential coverage. Additionally, the Affordable Care Act exempts certain groups from the requirement to carry minimum essential coverage, including: individuals whose required contribution for self-only coverage for a calendar year exceeds eight percent (adjusted for premium growth after 2014) of household income, members of federally recognized Native American nations, individuals whose income is below
2014 CCH Incorporated. All Rights Reserved.

types of coverage and their relationship to minimum essential coverage for purposes of the Affordable Care Act. The IRS explained that coverage under Medicares medically needy program is generally not government-sponsored minimum essential coverage, subject to certain exceptions. Coverage under a Section 1115 (Social Security Act) demonstration project generally is not government-sponsored minimum essential coverage. Certain military health coverage may be limited only to space available care and line-of-duty care. The proposed regs provide that this coverage is not government-sponsored minimum essential coverage. Minimum essential coverage does not include coverage that consists solely of excepted benets. The proposed regs clarify that minimum essential coverage excludes any coverage, whether insurance or otherwise, that consists solely of excepted benets. Continued on page 119

118 March 6, 2014

by the CCH Washington News Bureau

Camp releases tax reform bill

House Ways and Means Committee Chairman Dave Camp, R-Mich., unveiled his long-awaited comprehensive tax reform package on February 26 to mixed reaction. Camps proposed Tax Reform Bill of 2014 would reduce the number of individual tax brackets, cut the corporate tax rate, simplify, repeal or curtail many popular tax credits and deductions, and make a host of other changes to the Tax Code. House Speaker John Boehner, R-Ohio, said it is time to have a public discussion about tax reform but stopped short of endorsing Camps plan. House Minority Whip Steny Hoyer, D-Md., said that Camps proposal did not incorporate input from Democrats. For more details about Camps proposal, see the lead article in this weeks newsletter.

adequate funding, enforcement and service will continue to decline, he predicted.

More post-Windsor guidance for qualified plans in pipeline

More guidance for qualied plans on samesex marriage post-E.S. Windsor, 2013-2 USTC 50,400, is in the pipeline, a senior Treasury ofcial told tax professionals at the 38th Annual Tax Law Conference of the Federal Bar Association in Washington, D.C., on February 28. Robert Neis, deputy benets counsel, Ofce of Benets Tax Counsel, Treasury Department, indicated that this guidance is expected to be issued shortly. Beneciaries under qualied retirement plans, including spouses, are covered by many rules, some administered by the IRS and others by the Department of Labor. Before Windsor, same-sex spouses were not treated the same as opposite-sex spouses for purposes of the qualied plan spousal rules. In Rev. Rul. 2013-17, the IRS instructed qualied retirement plans to comply with Windsor and its place-of-celebration approach to same-sex marriage as of September 16, 2013. In December 2013, the IRS indicated on its website that it intended to issue guidance on how qualied retirement plans and other tax-favored retirement arrangements must comply with Windsor. Future guidance, the IRS reported, is expected to address plan amendment requirements, including the timing of plan amendments. This guidance is expected very soon, Neis noted.

IRS warns of more enforcement, service cuts

In scal year 2014, we expect audits conducted by the IRS will decline by an estimated 100,000 and the number of collection activities will decline by an estimated 190,000, IRS Commissioner John Koskinen told lawmakers on February 26. Testifying before the House Appropriations Subcommittee on Financial Services and General Government, Koskinen said that the IRSs current funding level is approximately $11.3 billion, or about $900 million below 2009, and the staff level has dropped by 10,000 employees. On February 28, IRS Deputy Commissioner John Dalrymple echoed Koskinens comments at the Annual Tax Law Conference of the Federal Bar Association in Washington, D.C. Telephone customer service at the IRS is at its lowest level since 2008, Dalrymple reported. Approximately four out of 10 taxpayers who telephone the IRS give up waiting before their calls are answered. No matter how energetically our employees work, we will not be able to keep with demand, Dalrymple said. Without Federal Tax Weekly

ciation in Washington, D.C., Craig Gerson, attorney, Treasury Ofce of Tax Legislative Counsel, said the government understands that the regs are controversial and are a signicant departure from existing rules. The proposed regs include a seven-year transition period. Gerson said the government does not want people to have to change what they are doing now, while the rules are under consideration. The transition relief and the effective date rules are meant to be helpful and reect the governments care in proposing the rules, he explained. The proposed regs also address bottom-dollar guarantees. A bottom-dollar guarantee is disregarded, and the debt being guaranteed is treated as nonrecourse, a practitioner observed. Gerson added that it is hard to see a guarantee as having commerciality if the guarantor is liable only for the rst dollar.

Administration urges Congress to enhance retirement security

The Obama administration and the Treasury Department are committed to expanding and enhancing retirement security and retirement saving, particularly for lower and moderateincome American workers, but much remains to be done, according to a U.S. Treasury ofcial. In testimony on February 26 before the Senate Finance Subcommittee on Social Security, Pensions and Family Policy, J. Mark Iwry, senior advisor to the Treasury Secretary and Deputy Assistant Secretary (Tax Policy) Retirement and Health Policy, said that the administration plans to promote more lifetime income in both dened benet and dened contribution plans, and to facilitate portability and consolidation of retirement savings. Iwry said administration ofcials will encourage employers to make Code Sec. 401(k) plans more automatic and effective, and extend coverage to workers not currently in the system. We believe that the myRA initiative is one meaningful step in that direction, Iwry added. Issue 10

Government reviewing comments on proposed partnership regs

The government will give full consideration to comments submitted on proposed partnership regs, NPRM REG-119305-11, which would limit basis for guarantees of partnership debt that are not commercially reasonable, a government ofcial said on February 28. Speaking at the Annual Tax Law Conference of the Federal Bar Asso-

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Practitioners Corner
Continued from page 117

Shared responsibility payment

Individuals failing to carry minimum essential coverage after January 1, 2014 and who are not exempt from the requirement will make an individual shared responsibility payment when they le their 2014 federal income tax returns in 2015. The amount of individual shared responsibility payment, if applicable, will vary depending on a taxpayers income, ling status and more. Generally, the individual shared responsibility payment is the greater of: $95 at dollar amount per uninsured person or one percent of household income over the ling threshold for 2014. $325 at dollar amount per uninsured person or two percent of household income over the ling threshold for 2015. $695 at dollar amount per uninsured person or 2.5 percent of household income over the ling threshold for 2016. After 2016, the $695 at dollar amount is indexed for ination. The Affordable Care Act generally provides a 300 percent family cap on the above monetary amounts and the overall shared responsibility payment is capped at the national average premium of a bronze-level health insurance plan available in a Marketplace. At this time, the federal government has not provided the national average premium of a bronze-level plan available in a Marketplace. Example. The Congressional Research Service (CRS) recently described some examples to illustrate how the individual shared responsibility payment operates. In its examples, CRS used a 2013 ling threshold of $10,000 for a single individual under age 65 with no dependents and $20,000 for a married couple ling a joint federal income tax return. In 2014, for single individuals with no dependents, CRS estimated that individuals with incomes above the ling threshold but at or below $19,500 will pay the $95 at amount; individuals with incomes above $19,500 and below the cap at the national average premium for bronze-level coverage will pay one percent of applicable

income. For a married couple with two children under age 18, CRS estimated that couples with incomes above the ling threshold but at or below $48,500 will pay a at dollar amount of $285; couples with incomes above $48,500 and below the cap at the national average premium for bronze-level family coverage will pay two percent of applicable income. CRS noted that the at dollar amount for a family cannot be greater than three times the at dollar amount for an individual. In 2014, the at dollar amount is limited to three times $95 (for a total at dollar amount of $285). The at dollar amount is, as described above, one-half for children under age 18. CRS explained that in 2013, the standard deduction was $6,100 and the personal exemption was $3,900, so that generally, the ling thresholds for individuals under age 65 was $10,000 for a single ling status and $20,000 for a married couple ling a joint return. The ling threshold, CRS explained, is linked to an ination adjustment based on the CPI-U and therefore may be higher in 2014 and subsequent years.

an outstanding tax debt, unpaid child support, debts owed to federal agencies, and in certain other cases.

Code Sec. 36B credit

The open enrollment period to purchase health care coverage through a state-run or federally-facilitated Health Insurance Marketplace for 2014 began October 1, 2013 and runs through March 31, 2014. The U.S. Department of Health and Human Services (HHS) recently reported that more than two-thirds of individuals who have obtained coverage through a Marketplace have been eligible for cost sharing or the Code Sec. 36B premium assistance tax credit. For purposes of the Code Sec. 36B credit, household income is the taxpayers modied adjusted gross income plus that of every other individual in his or her family for whom the taxpayer can properly claim a personal exemption deduction and who is required to le a federal income tax return. Modied adjusted gross income is the taxpayers adjusted gross income plus any excluded foreign income, nontaxable Social Security benets (including Tier 1 Railroad Retirement Benets), and taxexempt interest received or accrued during the tax year. However, Supplemental Security Income (SSI) is excluded. The Code Sec. 36B credit may be paid in advance to the insurer or claimed on the taxpayers return. Comment. Eligibility for the Code Sec. 36B premium assistance tax credit is linked to a taxpayers household income in relation to the federal poverty line. Generally, a taxpayer must have household income between 100 percent and 400 percent of the federal poverty line. For a family of four for tax year 2014, the IRS has explained that means income from $23,550 to $94,200. Taxpayers whose household incomes for 2014 are expected within a few percentage points over the respective cut-offs may want to consider some techniques to defer income to 2015 and other techniques to come within the parameters.

Individual payments
Koskinen told lawmakers that the IRS will enforce the individual shared responsibility payment requirements. The Affordable Care Act generally provides that the individual shared responsibility payment is assessed and collected in the same manner as most other assessable penalties under the Internal Revenue Code. However, the Affordable Care Act placed limitations on enforcement: The IRS may offset an unpaid payment against any federal income tax refund due to the taxpayer. Comment. The IRS cannot collect an unpaid individual shared responsibility payment through a lien or levy but it can offset a taxpayers refund, Kidd noted. Because the IRS will offset refunds, individuals may tend to feel they are not spending money since the payment is coming out of their refund and they are not writing a check. Comment. The IRS may offset generally where the taxpayer has
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120 March 6, 2014

March 7 Employers deposit Social Security, Medicare, and withheld income tax for March 1, 2, 3, and 4. March 10 Employees who received $20 or more in tips during February report them to their employers using Form 4070. March 12 Employers deposit Social Security, Medicare, and withheld income tax for March 5, 6, and 7.

March 14 Employers deposit Social Security, Medicare, and withheld income tax for March 8, 9, 10, and 11. March 19 Employers deposit Social Security, Medicare, and withheld income tax for March 12, 13, and 14. March 21 Employers deposit Social Security, Medicare, and withheld income tax for March 15, 16, 17, and 18.

March 13: CCH, a part of Wolters Kluwer, presents a webinar, Income Taxation of Trusts and Estates. The program will offer a clear review of how estates and trusts are taxed and the related compliance and planning issues and concerns for estates and trusts. To register, visit www.krm.com/ cch or call (800) 775-7654. March 14: CCH, a part of Wolters Kluwer, presents a webinar, Unrelated Business Income Tax: Navigating UBIT Complexities. The program will provide an overview of unrelated business taxable income, recent rulings and court decisions, exceptions, exclusions and modications. To register, visit www.krm.com/cch or call (800) 775-7654. March 18: CCH, a part of Wolters Kluwer, offers a program, Cross-Border Tax Issues for U.S. Companies Doing Business in Canada. Expert practitioners will discuss common tax issues, consequences and opportunities involved with U.S.Canadian cross-border transactions. To register, visit www.krm.com/cch or call (800) 775-7654. March 18: The American Bar Association Section of Taxation hosts its 2nd Annual International Tax Enforcement conference in Washington, DC. Government ofcials and practitioners will cover current enforcement efforts, dispute management, criminal investigation, and policy considerations. For more information or to register, visit www.americanbar.org or call (202) 662.8672. April 2425: Georgetown Law Continuing Education hosts a two-day program Representing and Managing Tax-Exempt Organizations in Washington, D.C. Speakers include government officials and expert practitioners, who will discuss important exempt organization issues including disaster relief, charitable giving, Code Sec. 501(c)(4) organizations, and more. Visit www.law.georgetown.edu or call (202) 662-9890 to register.

The cross references at the end of the articles in CCH Federal Tax Weekly (FTW) are text references to CCH Tax Research Consultant (TRC). The following is a table of TRC text references to developments reported in FTW since the last release of New Developments.
ACCTNG 21,054 ACCTNG 21,300 ACCTNG 33,256.05 ACCTNG 36,162.05 BUSEXP 6,162.15 BUSEXP 9,080 BUSEXP 9,104.30 BUSEXP 24,118.10 COMPEN 18,202 DEPR 3,504.05 DEPR 3,559 DEPR 3,602 EXEMPT 15,208 EXEMPT 18,252 EXEMPT 18,252 FILEBUS 9,108 FILEBUS 9,158.12 FILEBUS 9,158.30 FILEBUS 12,306 66 49 87 102 40 79 65 101 111 110 111 42 77 91 101 97 42 80 88 FILEIND 6,168.20 FILEIND 15,200 FILEIND 15,250 FILEIND 15,250 HEALTH 3,250 HEALTH 3,300 HEALTH 9,102 INDIV 48,050 INDIV 48,400 INDIV 60,114 INDIV 69,150 INTL 15,100 IRS 3,106 IRS 3,112 IRS 3,204.30 IRS 12,350 IRS 12,350 IRS 18,106 IRS 66,304 113 62 87 114 51 103 99 114 79 78 112 86 54 116 99 63 91 75 100 LITIG 6,114 NOL 9,254 NOL 27,052 NOL 33,056 PART 15,254 PART 27,058 PAYROLL 3,178 PENALTY 3,108.15 PENALTY 9,110 RETIRE 42,454 RETIRE 51,054.35 RETIRE 51,100 RETIRE 66,702 RETIRE 75,104.15 RETIRE 75,454.10 RIC 6,054.15 SALES 15,100 SALES 30,614 SCORP 560 65 77 75 67 63 115 43 54 100 89 104 53 64 66 89 92 113 103 90

Federal Tax Weekly

Issue 10