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Tax season toolkit.

Everything you need to hammer away at busy season.

After the bustle of the coming holidays, CPAs will be launched into tax season. With the rapid changes taking place in the economy and regulatory world, there's much to know when it comes to filing for your clients. But, never fear. CalCPA's annual Tax Season Toolkit is here.

California Tax Update

This year's legislative session included a number of bills aimed at making California a more competitive business environment. Other bills focused on funding higher education grants and promoting college savings through tax refunds. Here's a look at these and other changes you'll want to be aware of for the 2015 fling season.

Retroactive Changes

Mortgage Forgiveness Debt Relief

California retroactively extended its exclusion for personal income from qualified mortgage debt discharged on or after Jan. 1. 2013. and before Jan. I, 2014. The exclusion is limited to:

* Qualified principal residence indebtedness of 3800,000 ($400.(KM) for married persons or registered domestic partners filing separately!.

* Up to 8500,000 in gross income ($250,000 lor married persons or registered domestic partners filing separately! clue to qualified mortgage debt forgiven.

Taxpayers who have already reported discharged mortgage debt as income on his or her 2013 tax return can file a Form 540X, Amended Individual Income Tax Return, to exclude the income for a reduction in tax liability. Taxpayers who file a Form 540X will need to write "MORTGAGE DEBT RELIEF" in red capital letters across the top of the form.

Disaster Losses for San Diego Wildfires, Napa and Solano Earthquake

Both individuals and businesses located in declared disaster areas of Napa, Solano or San Diego counties that incurred disaster losses may amend their 2013 tax returns to claim the loss and obtain a refund.

Taxpayers claiming disaster losses should write "DISASTER LOSS XAPA EARTHQUAKE 2014" or "DISASTER SAX DIEGO WILDFIRES 201 I" in red capital letters across the top of their returns.

If a taxpayer's state tax returns were lost or damaged in either of the disasters, the taxpayer should complete FIB Form 3516, Request for Copy of Tax Return, to receive copies at no charge. This form will also need to be clearly marked a.s above) with the name of the disaster in red capital letters. For more details, sec I'I B Publication 1034 on disaster losses and how to claim a state tax deduction.

Legislation Effective in 20K

More California Competes Credits to be Awarded

For ihe 2014 15 fiscal year, die Governor's Office of Business and Economic Development (GO-Bizj is awarding $ 151.1 million in income tax credits to in-state businesses that will continue or expand their California operations and to out-of-state businesses that move into California. The California Competes Tax Credit is available to any size company in any industry operating at any location within the state.

GO-Biz will hold two more application periods to award credits: Jan. 5 Feb. 2 ($75 million is available! and March 9 April 6 ($30 million is available . Of the credits granted, 25 percent must go to small businesses with less than S2 million in prior-year sales. Originally, the credit could not reduce regular tax below tentative minimum lax; however, this bill corrected this oversight and the credit can now reduce regular lax below tentative minimum tax.

Reporting Requirement for Like-kind Exchanges of California Property

Individuals and businesses will need to comply with new reporting requirements on like-kind exchanges, starting with exchanges that occur in taxable years beginning on or after Jan. 1. 2014. California now requires taxpayers that defer gain or loss under IRC Sec. 1031 through the exchange of California property and acquiring out-of-state property to file an annual information return to report the exchange to FEB.

The FEB has finalized Form 3.840, California Like-kindExchanges, to meet this new reporting requirement. The Ibrrn must be filed in the year in which the like-kind exchange is completed and in each subsequent year that the gain or loss is deferred, regardless of whether the seller or exchanging party has any other California filing requirement.

Taxpayers must attach FIB Form 3840 to their California lax return and file it by the return's due date. Taxpayers without a California fifing requirement must still file FTB Form 3840 by the return clue dale as if the taxpayer did have a California filing requirement.

If the annual form is not filed, the FEB may recognize the deferred gain and issue an assessment..

College Access Tax Credit

For tax years beginning in 2014 16, individuals and businesses may claim an income tax credit for cash contributions made to the College Access Tax Credit Fund. For 2014, 2015 and 2016, the credit is equal to 60 percent, 55 percent or 50 percent of the amount contributed, respectively. The total allotted credits are capped at $500 million per calendar year.

Direct Deposit Refund into ScholarShare College Savings Trust

Individuals can request that their California tax refund be deposited directly into the stale's ScholarShare College Savings Plan. 'This option is available on lax returns filed in 2015 or later.

Mandatory E-Filing for Business Entity Returns

For tax years beginning on or after Jan. 1, 2014, any business entity dial files an original or amended tax return prepared using tax preparation software is required to electronical! file their return with the FIB unless they obtain a waiver.

Business entities ma' submit waiver requests prior to or up to 15 days after filing their return. Eligible business entities include those:

* That are subject to technology constraints;

* For which compliance would result in undue financial burden: or

* That are subject to other circumstances that constitute reasonable cause and not willful neglect.

To ease the transition to e-liling, the FTB plans to make the following available on its website iwwiv.Jlkca.goi in mid-December: Frequently asked questions about mandatory business entity e-filing;

* An e-file tutorial to help preparers set up and manage their e-file office processes;

* links to Other business e-file information; and

* An online waiver request process.

Nonqualified Foreign LLCs Now Subject to Contract Voidability and Check-the-Box Regulations

Foreign nonqualified LLCs are now subject lo the same contract voidability terms thai apply to foreign nonqualified corporations. This legislation also requires that the FTB's regulations related to the classification of a business entity be consistent with the federal regulations in effect as of May 1, 2014.

Check-off Option for Contributions to Designated Charitable Funds

Various bills enact or extend existing voluntary contribution options thai give individuals the choice to fund charitable organizations or check-off funds) through an automatic deduction of a portion of their income. These organizations include:

AB 1561, California Firefighters' Memorial Fund & California Peace Officer Memorial Foundation Fund;

* AB I 765, Habitat for Humanity Fund;

* SB 782, California Sexual Violence Victim Services Fund: and SB 997. California Senior Legislature Fund.

The FTB cannot add a new check-off fund until another voluntary contribution fund is removed from the forms.

Legislation Effective in 2015 or After

Employment Credit for New U.S. Air Force Advanced Strategic Aircraft Program

California will allow a tax credit for qualified taxpayers that hire certain employees to manufacture certain property for the I nked States Air Force for tax years beginning in 2015 29. The credit is capped at S25 million for each year through 2019. $28 million for years 2020 24 ancl S31 million for 2025 29.

New Motion Picture Credit

For tax years beginning in 2016 and later. California will offer the New Motion Picture Credit. The credit is equal to an applicable percentage (20 percent or 25 percent of qualified expenditures attributable to the production of a qualified motion picture in California. However, qualified expenditures used to compute the existing motion picture credit cannot be used to compute the new credit. Credits will be allocated by the California Film Commission on or alter July I, 2015, and before Jul 1. 2020.

The aggregate amount of credits that may be allocated by the commission in any fiscal year can be as high as $330 million per year through the 2019 20 fiscal year.

For tax years I icginning on or after Jan. 1. 2016, the taxpayer may sell to an unrelated party any awarded credit that is attributable to an independent film. In addition, the credit can reduce regular tax below tentative minimum tax.

Use Tax Will Now Be First Priority for Taxes Paid on FTB State Tax Returns

Starting in tax year 2015, the FTB will first apply available tax payments or credits to satisfy any self-reported use tax before applying payments or credits to outstanding income taxes, penalties or interest owed to the FTB.

Dependent Tax Identification Number Required on Returns

For tax years beginning in 2015 and later, individuals will be required to provide a taxpayer identification number (TIN) for each dependent they claim for the dependent exemption credit. If a I IN is not provided for a claimed dependent, the dependent exemption credit will be adjusted as a math error. A taxpayer would have the right to subsequently provide the TIN and receive a credit or refund as long a.s ii is provided prior to the expiration of the statute of limitations.

Recent Changes

Reasonable Cause Abatement Request Forms

The FTB released two new forms for taxpayers to submit requests regarding reasonable cause for penalty abatements:

* FTB 2917, Reasonable Cause Individual and Fiduciary Claim for Refund

* FTB 2924. Reasonable Cause Business En lily Claim for Refund

The standardized forms which can be completed online make it easier for the FIB to evaluate requests, reduce correspondence and speed processing. Although using these two forms is recommended, the FTB will continue to accept and process written reasonable cause abatement requests.

Economic Nexus Thresholds Indexed for Inflation

Since 201 I, business entities (corporations, LLCs and I .l's that have no physical presence in California may still be "doing business" in the state if certain economic thresholds for property, payroll or sales are exceeded.

For 2014, the inflation-indexed thresholds are 552,956 for California property or payroll ancl $529,592 for California sales.

Local, Sales and Use, and Property Taxes

San Francisco Gross Receipts Tax

Individuals and companies engaging in business within San Francisco will be required to pay a new gross receipts tax. The tax will phase in while the city's existing payroll-based lax phases out over a five- year period. The legislation contains prov isions for apportioning receipts to San Francisco, and new rules for combined groups and international businesses.

Registration fees $75 535,000) are determined by a taxpayer's San Francisco payroll expense for the previous tax year. Businesses with affiliated corporate entities will need to register as either a water's-eclge or worldwide combined group, depending on their California corporate income tax returns.

Sales and Use Tax Exemption for Manufacturing and Research

Businesses can now claim a partial sales and use tax exemption for qualified tangible personal property used in manufacturing and research and development. The exemption applies to purchases made July I. 2014 June 30, 2022. and reduces the state sales and use tax rate from 7.5 percent to 3.3125 percent before district tax rates are added) on purchases of up to $200 million per calendar year.

Qualified activities are classified under the NAICS codes for manufacturing 3111 to 3999. inclusive); biotechnology R&D (541711); ancl physical, engineering and life sciences R&D 541 712. Qualified tangible personal property includes machinery and equipment including components used for manufacturing or R&D with a useful life of at least one year.

Businesses can qualify at the entity level or at die establishment level that is. at the level of a cost center, division or separate physical location as lKmg as the entity or establishment is primarily engaged in manufacturing or R&D activities. Property items would qualify as long as 50 percent or more of their use is for qualified activities. The Board of Equalization provides the required exemption certificates for taxpayers on its website.

Realty Transfer Tax and Legal Entity Change of Ownership

In late September, a California appellate court held that, for purposes of charging the documentary transfer tax. Proposition 13 s definition of "change in ow nership" has the same meaning as "realty sold." Though the documentary transfer lax historically lias applied only to the transfer of real property, the ruling indicates that it w ill now apply to the transfer of ownership of a legal entity that owns California real property as well.

The county recorder collects documentary transfer tax when ownership transfer documents are filed. The county and city transfer lax is standardized at $1.10 per $1,000 of Che sale price throughout the state. However, certain incorporated cities collect an additional transfer lax. 'I'he city of Los Angeles imposes an additional transfer tax of 54.50 per SI ,000. lilies in Alameda County have some of the highest documentary transfer taxes, with Oakland at 515 per $1,000 ancl Piedmont at 513 per 51,000.

Active Solar Energy System New Construction Exclusion Sunset Date Extension

Active solar energy systems are excluded from new construction (for properly lax assessment purposesi to the first owner of the system. Originally scheduled to sunset in 2017. the exclusion has been extended to fiscal year 2023 24. Qualifying systems use solar devices thermally isolated from any area where the energy is used to collect, store or distribute solar energy. Swimming pool and hot tub heaters are excluded.

Claims must be made with the assessor and include documentation of the new system's cost. The exclusion remains in effect only until there is a subsequent change in ownership. IT rebates are claimed, the value to be excluded from reappraisal will be reduced by that amount. Property owners won't be subject to an increase in property tax that results specifically from the increase in value these systems generate.

Information compiled by Bob Reynolds, CPA, a state and local tax partner at Moss Adams LLP. You can reach him at

Federal Tax Tips

More Guidance on Economic Substance Doctrine

IRS Notice 2014-58 provides additional guidance regarding the codified economic substance doctrine and related penalties. For more information, see this month's Fed fax column Page 23 .

Final Modifications to Written Tax Advice Standards and Other Circular 230 Changes

Final regulations issued June 9 T.D. 9668 made various changes to Circular 230. The most important prov isions eliminate the complex rules for "covered opinions'' and expand written tax advice requ i re merits.

l'hercfore, tax practitioners will no longer need if) follow a separate set of standards regarding covered opinions when providing written advice clients. The I .S. 'Treason Department anticipates that the removal of this requirement will eliminate the use of a Circular 230 disclaimer in email and other w ritten communications because the new Sec. 10.37 rules on written opinions do not include the disclosure provisions in the old covered opinion rules discussed in California CPA. December 2012. Page 26).

These final regulations were effective June 12, 2014. Recommendation: Circular 230 disclaimers should be discontinued immediately for all emails and other written communications.

Federal Tax Matter' Defined

The proposed regulations did not define a "federal tax matter."' However, under Regs. Sec. 10.37(d . a federal tax matter is any matter concerning the application or interpretation of:

* A revenue provision as defined in IRC! Sec. 6110(i)(l)(B);

* Any provision of law impacting a person's obligations under the internal revenue laws and regulations, including, but not limited to. the person's liability to pay tax or obligation to file returns; or

* Any other law or regulation administered by the IRS.

Government Submissions

Government submissions on matters of general policy are not considered written advice on a federal tax matter for purposes of Regs. See. 10.37.

CPE Presentations

Continuing education presentations provided to an audience solely for the purpose of enhancing practitioners' professional knowledge on federal tax matters are not considered written advice on a federal tax matter for purposes of Regs. Sec. 10.37. However, this does not apply to presentations that market or promote transactions.

New Standards

The proposed regulations provided that the IRS will apply a heightened standard of review to determine whether a practitioner has satisfied the written advice standards when the practitioner knows or has reason to know that the w ritten advice will be used in promoting, marketing or recommending an investment plan or arrangement of a significant purpose of which is the avoidance or evasion of any tax imposed by the IRC!.

The IRS will apply a reasonable practitioner standard that considers all facts and circumstances with an emphasis given to the additional risk associated with the practitioner's lack of knowledge of the taxpayer's particular circumstances [Regs. Sec. 1 [c]:37(c) 2.

The final regulations require that practitioners relate applicable law and authorities to the facts [Regs. Sec. 10.37 a. 2105 .

Procedures to Ensure Compliance

The proposed regulations provided that any practitioner w ho has principal authority and responsibility lor overseeing a firm's practice must take reasonable seeps to ensure that the firm has adequate procedures for all members, associates ancl employees, to comply with Circular 230. The proposed regulations also provided that such a practitioner was subject to discipline for his failure.

The final regulations retain these provisions [Regs. Sec. 10.31) a and Regs. Sec. 10.30(b. They also add a provision under which practitioners arc subject to the same discipline if they do not take reasonable steps to ensure those procedures are properly followed |Regs.

Sec. 10.36(b)(2)]. Practitioner Competence

Proposed Regs. Sec. 10.35 provided that a practitioner must possess the necessary competence to engage in practice before the IRS and that competent practice requires the appropriate level of knowledge, skill, thoroughness and preparation necessary for the matter for which the practitioner is engaged. Final Regs Sec. 1035 contemplates that practitioners may become competent in a variety of ways.

Court Rules Against Contingent Fee Prohibition

A federal court held that the IRS exceeded its authority when it attempted io regulate the preparation and filing of ordinary refund claims by CPA tax return preparers 'Ridgely v. Lew. D.D.C., 1:12 cv-00565. 2014 BL 196974. July 16. 2014).

The U.S. District Court for the District of Columbia relied heavily on the reasoning set forth in the U.S. Court of Appeals for the District of Columbia's decision in Laving v. IRS {1VI F.3d 1013. 2014).

The judge concluded that the IRS lacked authority under 31 U.S.C. Sec. 330, which originally was enacted in 188 1 and authorizes the Treasury Department to regulate representatives who practice before it. to regulate tax return preparers. He said that the plain text of Sec. 330 excludes preparers and filers of ordinary refund claims from the ambit of the IRS's regulatory authority.

Specifically at issue in the case was the IRS's proclaimed authority to regulate fee arrangements entered into by CPAs for preparing and filing ordinary refund claims before the commencement of any- adversarial proceedings with the IRS or any Ibrmal legal representation by the CPA.

New Appeals Judicial Approach and Culture Guidelines

Phase one of this new appeals process began with a July 18. 2013, Department of the Treasury memo providing guidance to the Office of Appeals personnel for executing the revised procedures.

This memo stated that the Appeals Judicial Approach and Culture project is returning Appeals to a quasi-judicial approach in the way it handles cases to enhance internal and external customer perceptions of a fair, impartial and independent Appeals.

That guidance stated that Appeals would not raise new issues or reopen issues agreed to by taxpayers and the Compliance Division, such as new issues in docketed cases and new issues versus new arguments.

This guidance also simplified dissent procedures and clarified certain policies with Appeals hearing officers. Appeals also will not attempt to settle a case on factual hazards when cases submitted In Compliance are undeveloped or do not present new information.

Appeals will release jurisdiction when the taxpayer provides new information, though the release criteria may vary based on Appeals' workload, keeping Appeals officers from acting as investigators.

Phase two of this plan, effective Sept. 2, 2014, finalized the interim guidance. A July 2 memo to Appeals stall' from John V Cardone. IRS director of policy, quality and case support, stated that Appeals w ill not generally return cases to Compliance for further development.

However, he outlined certain circumstances as grounds for returning a case including (but not limited to):

* The case is missing a protest, or the protest, when required, fails to set forth the taxpayer's position, lacks detail or fails to meet the requirements of IRS Publication 5. Your Appeal'Rights and How to Prepare a Protest You Don't Agree (January 1909);

* Some action must be taken or some event must occur before Appeals can adequately consider the case;

* Technical advice was pending at the time off the referral;

* Appeals discovers potential fraud, malfeasance or misrepresentation of a material fact: or

* The taxpayer provides new information or evidence.

Thus, Appeals will only hear cases that are fully developed; hearing officers will not do their own investigations and will send any new issues raised or evidence submitted by the taxpayer during the appeal back to the originating function for consideration.

This memo defines a fully developed case as one that "has all pertinent evidence well documented with an easy to follow audit trail." Generally, the case contains the evidence needed to support the revenue agent's proposed adjustments.

Appeals will attempt to settle a case based on fact ual hazards i.e., uncertainty as to what facts a court would Imd to be true if it is not fully developed and the taxpayer has provided no new information or evidence.

The memo also instructs the staff that if the taxpayer or representative "unreasonably delays the process by intentionally submitting new information or raising new issues multiple times." the case will not be sent to Compliance for more analysis the Appeals officer can make a determination based on the officer's assessment of the factual hazards of litigation.

Previewing the final guidance, Appeals Team Manager Philip A. Ovofo said at die Aug. 20 IRS National Tax Forum that Appeals will no longer be examiners, investigators or collectors. The focus will be on settling cases.

Ovofo and Matthew N. McLaughlin, another team manager, further staled that if taxpayers try to raise new issues in Appeals, the cases would be sent back to Compliance. "Appeals won't raise new issues, period," McLaughlin said.

These managers said il" Appeals receives a case chat is not well- developed, it will work to setde the case based on the available information rather than trying to further expand the case.

"We encourage taxpayers to provide Compliance with all the information so the case can be adequately developed" Ovofo said.

He emphasized that the case should only be sent to Appeals if an impasse is reached. He said that Appeals w ill then try to settle the case based on factual hazards. "The majority of cases won't be sent back." lie said. I lowcver, Appeals will not further develop a case or take i nvestigative action.

Ovofo urged taxpayers to consider IRS options to resolve cases early; including fast-track settlement, mediation and early referral.

Collection Activity

McLaughlin said Appeals will no longer investigate financial statements or do work, such as accessing third-party databases for information on the financial situations of taxpayers diat want to submit oilers to the IRS. He said there will be no coordination of investigation between Appeals and Collections. "Collections does the investigation on its own."

Compliance officers will make the initial decision for all oilers submitted by taxpayers during collection due process proceedings and all offers in compromise will be initially worked by Compliance. However, Appeals will:

* Identify the disputed issue;

* Ask the taxpayer for substantiation;

* Refer new information to Compliance, if needed; and

* Sustain rejections of offers only under the same basis for what the offer was initially rejected by Compliance.

McLaughlin said thai taxpayers should present all documents and arguments to Compliance without "saving" anything for Appeals. Taxpayers also should be aware of issues that can and cannot be raised during appeals and understand that some information may be returned to Compliance for review and investigation.

S Corps, Restricted Stock and ESOPS

In 1998, two executives formed an S corp and each received 47,500 shares of its common stock. The S corp simultaneously issued 5,000 shares to its employee stock ownership plan (ESOP), of which these executives were among the beneficiaries. The executives concurrently signed a restricted stock agreement and an employment agreement, which were explicitly linked to each other.

The S corp stock would lose more than half its value if die executives were terminated "for cause." Under Regs. See. 1.83-3(c)(2), "... requirements that the property be returned to the employer if the employee is discharged for cause or for committing a crime will not] be considered to result in a substantial risk of forfeiture ... ." However, in Austin el ah.

Commissioner. I I I TC No. 18. Dec. 16, 2013, the Tax Court held that this slock was restricted for purposes of this regulation since it was subject to a substantial risk of forfeiture.

The meaning of "for cause" as used by the executives in their agreements was broader than lhat used in the regulation. It included what is commonly referred to as unsatisfactory job performance, which is not a remote category of event thai is unlikely to occur-in contrast to criminal activity

Therefore, sinee this stock was subject to a substantial risk of forfeiture, it was not vested.

Regs. Sec. 1.1361-1 I) i.3) provides that, lor purposes of Subchapter S, stock issued in connection with the performance of services and that is substantially nonvested is not treated as outstanding stock of the corporation and the holder of that stock is not treated as a shareholder, solely by reason of holding such stock I unless the holder makes a Sec. 83d) election .

Consequently, all of the S corp's income was allocated to the ESOP which is exempt from taxation under Sec. 501(a).

Sec. 1361 tc 6 allows qualified retirement plans, such as an ESOP. to be an S corp shareholder.

Under Sec. 512 en 1), if an organization described in Sec. 1361 (c)(6) holds S corp stock, such interest shall be treated as an interest in an unrelated trade or business and all items of income, loss or deduction taken into account under Sec. 1366(a shall be taken into account in computing the organization's unrelated business taxable income.

But, Sec. 512(e)(3) provides that Sec. 512(ei( I does not apply to employer securities held by an KS( )P described in Sec. 4975'e 7 . Thus. none of the S corp s income would be subjected to federal income tax.


The court denied the IRS motion for partial summary judgment, which was based solely on the theory that Regs. Sec. 1.83-3 ei'2 caused the executives' S corp stock to be "substantially vested" when it was issued to them.

The IRS advanced other theories addressed to the overall structure that the executives implemented and to the specific question of whether their stock was "substantially vested" upon issuance.

For example, as an alternative to its theory based on this regulation, the IRS contended that the executives" stock was "substantially vested" on the theory that the executives' status as the S corp's sole directors enabled them to remove at w ill any ownership restrictions to which their slock was subject so that the forfeiture conditions were unlikely to be enforced. 1 he court cited Sec. 1.83-3ic 3), which deals with enforcement of forfeiture conditions.

Hence, the court stated that this theory, like the IRS' other theories, remains Jor trial on the merits.

Because the executives' cross-motion sought summary judgment on one or more of these other IRS theories, which involve material issues of disputed fact, this cross-motion also was denied.

New Automatic Extension for 'Portability' Elections

Rev. Proc. 2014-18 provides a simplified method for certain taxpayers to automatically obtain an extension of time to make a "portability" election under Sec. 20IOlc)(5)(A . If this election is made, a decedent's unused exclusion amount deceased spousal unused exclusion amount becomes available to apply to the surviving spouse's subsequent transfers during life or at death.

No user lee is required for submissions under this revenue procedure.

Rev. Proc. 2014-18 applies only if:

1. The taxpayer is the executor, as defined in Regs. Sec. 20.2010-2T (6), of the estate of a decedent who:

* Mas a surviving spouse;

* Died ajier 2010 and before 2014; and

Was a I '.S. citizen or resident on the date of death;

2. The taxpayer is not required to file an estate tax return Form 70 under Sec. 6018(a). based on the value of the gross estate and adjusted taxable gifts;

3. I he taxpayer did not timely file an estate tax return: and

4. All the procedural requirements in Section 4 of this revenue procedure are satisfied, including filing a complete and properly- prepared Form 706, in accordance with Regs. Sec. 20.2010-2 T(a 7 . by Dee. 31, 2014.

FICA Wages

In U.S. v. Quality Stores. Inc. No. 12-1408, 201 I BL 80719, Mar. 25, 201 I . the Supreme Court, in an 8-0 opinion, reversed a decision by the Sixdi Circuit Court of Appeals. The high court held that supplemental unemploy ment benefits paid to terminated employees were wages subject to Federal Insurance Contributions Act taxes because these payments were remuneration for services and were not linked to the receipt of state unemployment benefits.

IRA Rollovers

Sec. 108(d 13 'A i generally provides thai any amount distributed from an IRA will not be included in the distributee's gross income to the extent the amount is paid into another IRA for the distributee's benefit no later than 60 clays alter the distributee receives the distribution. But. under Sec. 408id 3 (B;>, an individual is permitted to make only one rollover described in the preceding sentence in any one-year period. Both Proposed Regs. Sec. 1.408-4(b)(4)(ii ) ancl IRS Publication 590, Individual Retirement Arrangements (IR-Ls). provide that this limitation is applied on an IRA-by-lRA basis.

I lowevcr, a recent fax Court opinion in Bobrow v. Commissioner TC. Memo 2014-21 held that the limitation applies on an aggregate basis. Therefore, an individual could not make an IRA-to-IRA rollover if the individual had made such a rollover involving any of the individual's IRAs in the preceding one-year period.

IRS Announcement 2014-15 I.R.B. 201 1-16. Mar. 20, 2014; states the IRS anticipates it will follow Sec. 408 d o b's interpretation in Bobrow and, accordingly, intends to withdraw the proposed regulation and revise Publication 590 to the extent needed to follow that interpretation. These IRS actions will not affect an IRA ow ner's ability to transfer funds from one IRA trustee directly to another, because such a transfer is not a rollover and. therefore, is not subject to the one- rollover-per-year limitation of Sec. 408(cl)(3 B). See Rev. Rul. 78-406 (1978-2 C.B. 157).

The IRS has received comments about the administrative challenges presented by Bobrow interpretation of Sec. 108 d 3) B . The IRS understands that adoption of the Tax Court's interpretation of the statute will require IRA trustees to make changes iu the processing of IRA rollovers and in IRA disclosure documents, which will take time.

Accordingly, the IRS will not apply Bobrows interpretation of Sec. 408(d)(3)(B to any rollover that involves an IRA distribution occurring before Jan. I. 2015. Regardless of the ultimate resolution of Bobrow, die Treasury Department and the IRS expect to issue a proposed regulation under Sec. 408 that would provide that the IRA rollover limitation applies on an aggregate basis. However, in no event would this regulation be effective before Jan. 1, 2015.

Notes; The IRS withdrew Prop. Regs. Sec. 1.408-4(b)(4)(ii) |REG- 209459-78]July II.

Announcement 201 1-32 I.R.B. 201 1-48, Nov. 24. 201 h provides further guidance on this matter.

Passive Losses

Material Participation by Trust

In Frank Aragona Trust 142 T.C. No. 9, Mar. 27, 2014), the Tax Court held that a residuary trust that owned and developed rental and other real estate properties qualified for the See. 469(c): 7) passive loss exception (or real estate professionals. Thus, this trust was not subject to the passive loss limitations and could fully deduct its expenses, including trustee fees.

The court found that services performed by individual trustees constituted personal serv ices performed by the trust. Consequently; tin- trust materially participated in its real property business.

Observation: This case will help minimize the new net investment income tax under Sec. 1411.

Real Property Foreclosure

A foreclosure on real property, treated as a passive activity; "freed up" suspended passive losses under Sec. 469(g)i 1 iiA . These losses were not reduced by the debt cancellation income excluded from gross income by the insolvency exception under Sec. 108.a 1 B . See Chief Counsel Advice 201415002, Feb. 11,2014.

Consolidated Return Leniency

Regs. Sec. 1.1502-75(1.) authorizes the IRS Commissioner, in certain situations, to treat a subsidiary as if it had filed Form 1 122. Authorization and Consent of Subsidiary Corporation To Be Included in a Consolidated Income Tax Return, even though it failed to do so, for instance, clue to a mistake of law or fact or if it was inadvertently not filed.

Rev. Proc. 2014-24 I.R.B. 2014-13, Mar. 10. 2014) states die Commissioner will treat one or more subsidiaries as if Form 1 122 had been filed under the conditions described in Section 3 of this revenue procedure.

Generally, if an affiliated group satisfies Section 3's requirements, the Commissioner's automatic determination granted by Rev. Proc. 2014-24, Section 3.01, is the exclusive means for determining that a subsidiary joined in a consolidated return without filing Form I 122. This automatic determination is available regardless of whether the parent's return is under examination.

If an affiliated group cannot satisfy Section 3's requirements, the Commissioner's determination under Regs. Sec. 1.1502-751 b) is available only pursuant to a determination letter issued by a "Director" | defined in Rev. Proc 2014-1, Section 1.01 (3)]./l $275 user fee applies.

Supreme Court Provides Standard for Challenging IRS Summonses

In Clarke, June 19, 2014, the Court held that a taxpayer has a right to a hearing to challenge an IRS summons if the taxpayer can show specific facts or circumstances plausibly raising an inference of governmental bad faith. However, naked allegations of improper purpose are insufficient: the taxpayer must offer some credible evidence supporting the claim of improper motive.

Statute of Limitations

A six-vear statute of limitations applies for income taxes if the taxpayer omits from gross income an amount exceeding 25 percent of the gross income reported in the return.

Regs. Sec. 301.6501 e)-l(a nl)iii provides that gross income generally means only the gains realized from the disposition of" investment property. It further provides that, generally, an understated amount of gross income resulting from an overstatement of unrecovered cost or other basis constitutes an omission from gross income.

The Supreme Court invalidated this latter provision April 25, 2012, in Regs. Sec. 301.6501 (ei-l (all I iii (see the June 2012 California CPA. Page 25). However, the l ax Court held the remainder of this regulation to be valid Aug. 28, 2014 (see Barken, 143 TC No. 6). Therefore, to determine whether there is a 25 percent income omission, only gains are taken into account not the total amounts realized from dispositions of investment properties.

Chief Counsel Advice Discusses What Number to Use for Disregarded Entity

Chief (Counsel Advice 201351018 considered the following facts: A partnership had two partners, individuals X and Y. X bought out V, who became X's employee. The former partnership also had other employees. The partnership terminated because X was the only- remaining partner and it became a disregarded entity. The partnership also terminated under state law;

The CCA stated thai the former partnership must continue to use its old employer's identification number for employ ment tax purposes. Also see Regs. Sec. 301.770 l-2(c)(iv)(B).

This same treatment generally applies lor excise tax purposes.

For all oilier federal tax purposes, the disregarded entity is treated as X's sole proprietorship ancl, generally, must use its owner's iX's) taxpayer identification number.

X would be die appropriate party to consent to an extension of the statute of limitations and to receive examination notices as the disregarded entity's owner.

Affiliated Group Subject to Graduated Tax Rates Even Though Parent Was a Qualified Personal Service Corporation

In Applied Research Associates, Inc.. 143 TC No. 17. Oct. 9. 2014, the 'l ax Court held that the graduated tax rates imposed by Sec. I l(bn 1 . and not the 35 percent flat tax rate set forth in Sec. 11 b)(2), applied to the consolidated taxable income of an affiliated group consisting of a qualified personal service corporation parent [defined in Sec. 448(d (2)] and a non-qualified' personal service corporation subsidiary. 'This treatment was available despite the following facts:

Proposed Regulation Would Eliminate 36-month Testing Period for Reporting Discharge of Indebtedness by Certain Entities

A proposed amendment to Regs. Sec. I.6050P-1 RFC-136676-13, Oct. 1 I. 2014; would eliminate the 36-month testing period contained in Regs. Sec. 1.6050P-1 In i 11 that generally requires a creditor to file an information return on IRS Form 1099-C, Cancellation of Debt, if the creditor has not received a payment on an indebtedness at any time during a 36-month testing period.

This test would be eliminated on the date that this proposal is published as a final regulation in the Federal Register.

Automatic Consent for Accounting Method Changes Involving Tangible Property Dispositions

Rev. Proc. 2014-54. I.R.B. 201 Ml, Oct. 6, 2014, grants automatic consent to taxpayers changing their accounting methods to comply with the final regulations on dispositions of tangible depreciable property

This revenue procedure allows late partial disposition elections under Sec. 1G8.

Rev. Proc. 2014-54 generally is effective Sept. 18. 201 1 subject to various transition rules.

2015 Inflation Adjustments

For 2015 pension plan limitations, see IR-20I 1-99, Oct. 23, 2014. For other 2015 inflation adjustments, see Rev. Proc. 2014-61, I.R.B. 2014-47. Nov. 17, 2014.

Also, the maximum amount of earnings subject to Social Security tax will be increased to SI 18,500 for 2015 from SI I 7.000 for 2014.

Foreign Account Disclosures

The IRS expanded streamlined procedures to provide relief id more taxpayers for nonwillful violations. It also tightened some requirements of the Offshore Voluntary Disclosure Program and increased penalties for intentional tax violations 1R-2014-73. June 18, 2014. Fact Sheets 2014-6 and -7, and revised Frequently Asked Questionsi.

In additional guidance dated Oct. 8. 2014, but announced Oct. 10. the IRS posted Co its website:

* Compliance procedures and a set of Frequently. 1 sked Questions and Answers for taxpayers outside the United States;

* Compliance procedures and an FAQ lor taxpayers inside the IJnited States; and

* Compliance procedures and an FAQ Ibr those taxpayers who want to submit delinquent international information returns.

Under new FAQ I. the IRS said it has eliminated FAQ 18 under the 2012 OVDP program, which granted automatic penalty relief for taxpayers who were otherwise fully compliant. Instead of the automatic relief, taxpay ers must now explain a "reasonable cause" for their delinquency.

Canadian Retirement Plan Beneficiaries

Rev. Proc. 2014-55, I.R.B. 201 I-14. Oct. 27. 2014, provides that eligible U.S. citizens and residents who are beneficiaries of Canadian registered retirement saving plans ancl Canadian registered retirement income funds now automatically qualify for tax deferrals similar to those available for participants in individual retirement accounts and Sec. 401 (k) plans.

These beneficiaries will be treated as having made an election under Article XVIII(7) of the U.S.-Canadii Income fax Treaty to defer U.S. income tax on income accrued in these plans until distributed.

This relief is retroactive to the first year in which they would have been entitled to make the election under this treaty.

Also, the annual reporting requirement on IRS Form 8891 has been eliminated. 121

This year's Legislative session included a number of bills aimed at making California a more competitive business environment. Other bills focused on funding higher education grants and promoting college savings through tax refunds.

Information compiled by Stuart R. Josephs, CPA. You can reach him at
Taxable Income    2006        2007
Parent          $283,387    $265,44
Subsidiary     (235,827)  (184,625)
Consolidated     $47,560    $80,779
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Author:Josephs, Stuart R.
Publication:California CPA
Geographic Code:1U9CA
Date:Dec 1, 2014
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