AICPA Tax Insider (May 7, 2020): PPP Loans + Tax Deductions; Current S Corp Developments; Online PLR Requests; No Penalty for Form 3520 Nonfiling + More

District court lowers penalties for Form 3520 nonfiling to zero

By Steven L. Walker, J.D., LL.M.

Taxpayers facing penalties for failure to file the information form for reporting transactions with foreign trusts should check IRS computations.

PLR and other requests for IRS guidance can now be sent electronically

In another response to the coronavirus pandemic, the IRS is temporarily allowing taxpayers to submit requests for private letter rulings, closing agreements, determination letters, and information letters electronically instead of by mail.

AICPA challenging nondeductibility of PPP-related expenses

The IRS issued guidance clarifying that a deduction is disallowed for expenses for payroll costs, mortgage interest, rent, utilities, and other interest on debt obligations to the extent they are being reimbursed by loans forgiven under the Paycheck Protection Program.The AICPA does not agree with this interpretation.

CARES Act QIP change requires action

By Elizabeth Young, CPA, J.D., LL.M., and Alex Scott, J.D., LL.M.

Taxpayers with qualified property must act to take advantage of changes to the treatment of qualified improvement property (QIP), which is now eligible for bonus depreciation. Here are some considerations for taxpayers and their advisers.

Current developments in S corporations

By Members of the AICPA S Corporation Taxation Technical Resource Panel

This annual update on S corporations covers cases, regulations, and IRS rulings that have been issued in the last year, including the rules for eligible terminated S corporations.

Puerto Rico: A permanent tax deferral in a GILTI world?

By Natallia Shapel, CPA; Emma Norwood; and Gabriel F. Hernandez, CPA

Under the right set of circumstances, Puerto Rico tax incentives afforded to individual resident investors and export services businesses can present a significant opportunity for tax savings.

Weekly Document Summaries

C CORPORATIONS

Court rejects numerous tax deductions taken by California medical marijuana dispensary

The Tax Court held that a California not-for-profit mutual benefit corporation that operated a medical marijuana dispensary (1) was precluded by Sec. 280E from deducting additional costs of goods sold (COGS) and other business expenses other than those the IRS had already allowed; (2) was a reseller of marijuana under Sec. 471 and thus could not deduct additional indirect costs included in COGS; (3) provided no evidence in support of business changes that necessitated a change in its method of accounting and thus was not allowed to change its accounting method under Sec. 446 for tax year 2015; and (4) was liable for Sec. 6662(a) accuracy-related penalties. The court noted that, while the corporation hired an accountant to prepare its tax returns, it provided no evidence that it relied on its accountant for advice on the positions it took on its tax returns. Richmond Patients Group, T.C. Memo. 2020-52 (5/4/20).

INTERNATIONAL

US parent corporation’s income was foreign base company sales income

The Tax Court held that income earned by a U.S. parent corporation’s controlled foreign corporation (CFC) in Luxembourg from sales of appliances by that CFC to the U.S. parent and to the U.S. parent’s Mexican CFC constituted foreign base company sales income (FBCSI) under Sec. 954(d) and, as such, was taxable to the U.S. parent corporation as Subpart F income under Sec. 951(a). According to the court, regardless of whether the appliances sold by the Luxembourg CFC were actually manufactured by it, the sales income was FBCSI under Sec. 954(d)(2) because the Mexican branch is treated as a subsidiary of the Luxembourg CFC, and the sales income earned by the Luxembourg CFC constitutes FBCSI. Whirlpool Financial Corp., 154 T.C. No. 9 (5/5/20).

IRS PROCEDURE

Oil recovery and marginal production reference price published

The IRS published the reference price under Sec. 45K(d)(2)(C) for calendar year 2019. The reference price applies in determining the amount of the Sec. 43 enhanced oil recovery credit, the Sec. 45I marginal well production credit, and the Sec. 613A percentage depletion in case of oil and natural gas produced from marginal properties. Notice 2020-28 (5/4/20).

2020 marginal production depletion percentage is 15%

The IRS announced that the applicable percentage for purposes of determining percentage depletion on marginal properties for calendar year 2020 is 15%. Notice 2020-30 (5/4/20).

Adjustment factor and phaseout amount for the 2020 enhanced oil recovery credit

The IRS announced the inflation adjustment factor and phaseout amount for the enhanced oil recovery credit for tax years beginning in calendar year 2020. Because the reference price for the 2019 calendar year ($55.55) exceeds $28 multiplied by the inflation adjustment factor for the 2019 calendar year ($28 multiplied by 1.7640 = $49.392) by $6.16, the enhanced oil recovery credit for qualified costs paid or incurred in 2020 is phased out completely. Notice 2020-31 (5/4/20).

IRS addresses approval requirement for certain tax-exempt bonds during pandemic

The IRS issued temporary guidance regarding the public approval requirement under Sec. 147(f) for tax-exempt qualified private activity bonds. Specifically, in light of the COVID-19 pandemic, the guidance provides that hearings held by teleconference as described in Section 4.01 of the guidance will be treated as held in a location that, based on the facts and circumstances, is convenient for residents of the approving governmental unit for the purpose of Regs. Sec. 1.147-1(d)(2). Rev. Proc. 2020-21 (5/4/20).

TAX ACCOUNTING

Expanded temporary rule allows governmental issuers to purchase own tax-exempt bonds

The IRS is temporarily expanding the circumstances and time periods in which a tax-exempt bond that is purchased by its state or local governmental issuer is treated as continuing in effect without resulting in a reissuance or retirement of the purchased tax-exempt bond solely for purposes of Sec. 103 and Sec. 141 through Sec. 150. The IRS said that, in recognition of the need for liquidity and stability in the markets, including the short-term tax-exempt bond market, during the current period of economic disruption, it is expanding the time periods during which governmental issuers may purchase and hold their own tax-exempt qualified tender bonds and tax-exempt commercial paper. Notice 2020-25 (5/4/20).

Safe harbors are provided for distributions declared by certain REITs or RICs

C CORPORATIONS

Court rejects numerous tax deductions taken by California medical marijuana dispensary

The Tax Court held that a California not-for-profit mutual benefit corporation that operated a medical marijuana dispensary (1) was precluded by Sec. 280E from deducting additional costs of goods sold (COGS) and other business expenses other than those the IRS had already allowed; (2) was a reseller of marijuana under Sec. 471 and thus could not deduct additional indirect costs included in COGS; (3) provided no evidence in support of business changes that necessitated a change in its method of accounting and thus was not allowed to change its accounting method under Sec. 446 for tax year 2015; and (4) was liable for Sec. 6662(a) accuracy-related penalties. The court noted that, while the corporation hired an accountant to prepare its tax returns, it provided no evidence that it relied on its accountant for advice on the positions it took on its tax returns. Richmond Patients Group, T.C. Memo. 2020-52 (5/4/20).

INTERNATIONAL

US parent corporation’s income was foreign base company sales income

The Tax Court held that income earned by a U.S. parent corporation’s controlled foreign corporation (CFC) in Luxembourg from sales of appliances by that CFC to the U.S. parent and to the U.S. parent’s Mexican CFC constituted foreign base company sales income (FBCSI) under Sec. 954(d) and, as such, was taxable to the U.S. parent corporation as Subpart F income under Sec. 951(a). According to the court, regardless of whether the appliances sold by the Luxembourg CFC were actually manufactured by it, the sales income was FBCSI under Sec. 954(d)(2) because the Mexican branch is treated as a subsidiary of the Luxembourg CFC, and the sales income earned by the Luxembourg CFC constitutes FBCSI. Whirlpool Financial Corp., 154 T.C. No. 9 (5/5/20).

IRS PROCEDURE

Oil recovery and marginal production reference price published

The IRS published the reference price under Sec. 45K(d)(2)(C) for calendar year 2019. The reference price applies in determining the amount of the Sec. 43 enhanced oil recovery credit, the Sec. 45I marginal well production credit, and the Sec. 613A percentage depletion in case of oil and natural gas produced from marginal properties. Notice 2020-28 (5/4/20).

2020 marginal production depletion percentage is 15%

The IRS announced that the applicable percentage for purposes of determining percentage depletion on marginal properties for calendar year 2020 is 15%. Notice 2020-30 (5/4/20).

Adjustment factor and phaseout amount for the 2020 enhanced oil recovery credit

The IRS announced the inflation adjustment factor and phaseout amount for the enhanced oil recovery credit for tax years beginning in calendar year 2020. Because the reference price for the 2019 calendar year ($55.55) exceeds $28 multiplied by the inflation adjustment factor for the 2019 calendar year ($28 multiplied by 1.7640 = $49.392) by $6.16, the enhanced oil recovery credit for qualified costs paid or incurred in 2020 is phased out completely. Notice 2020-31 (5/4/20).

IRS addresses approval requirement for certain tax-exempt bonds during pandemic

The IRS issued temporary guidance regarding the public approval requirement under Sec. 147(f) for tax-exempt qualified private activity bonds. Specifically, in light of the COVID-19 pandemic, the guidance provides that hearings held by teleconference as described in Section 4.01 of the guidance will be treated as held in a location that, based on the facts and circumstances, is convenient for residents of the approving governmental unit for the purpose of Regs. Sec. 1.147-1(d)(2). Rev. Proc. 2020-21 (5/4/20).

TAX ACCOUNTING

Expanded temporary rule allows governmental issuers to purchase own tax-exempt bonds

The IRS is temporarily expanding the circumstances and time periods in which a tax-exempt bond that is purchased by its state or local governmental issuer is treated as continuing in effect without resulting in a reissuance or retirement of the purchased tax-exempt bond solely for purposes of Sec. 103 and Sec. 141 through Sec. 150. The IRS said that, in recognition of the need for liquidity and stability in the markets, including the short-term tax-exempt bond market, during the current period of economic disruption, it is expanding the time periods during which governmental issuers may purchase and hold their own tax-exempt qualified tender bonds and tax-exempt commercial paper. Notice 2020-25 (5/4/20).

Safe harbors are provided for distributions declared by certain REITs or RICs

C CORPORATIONS

Court rejects numerous tax deductions taken by California medical marijuana dispensary

The Tax Court held that a California not-for-profit mutual benefit corporation that operated a medical marijuana dispensary (1) was precluded by Sec. 280E from deducting additional costs of goods sold (COGS) and other business expenses other than those the IRS had already allowed; (2) was a reseller of marijuana under Sec. 471 and thus could not deduct additional indirect costs included in COGS; (3) provided no evidence in support of business changes that necessitated a change in its method of accounting and thus was not allowed to change its accounting method under Sec. 446 for tax year 2015; and (4) was liable for Sec. 6662(a) accuracy-related penalties. The court noted that, while the corporation hired an accountant to prepare its tax returns, it provided no evidence that it relied on its accountant for advice on the positions it took on its tax returns. Richmond Patients Group, T.C. Memo. 2020-52 (5/4/20).

INTERNATIONAL

US parent corporation’s income was foreign base company sales income

The Tax Court held that income earned by a U.S. parent corporation’s controlled foreign corporation (CFC) in Luxembourg from sales of appliances by that CFC to the U.S. parent and to the U.S. parent’s Mexican CFC constituted foreign base company sales income (FBCSI) under Sec. 954(d) and, as such, was taxable to the U.S. parent corporation as Subpart F income under Sec. 951(a). According to the court, regardless of whether the appliances sold by the Luxembourg CFC were actually manufactured by it, the sales income was FBCSI under Sec. 954(d)(2) because the Mexican branch is treated as a subsidiary of the Luxembourg CFC, and the sales income earned by the Luxembourg CFC constitutes FBCSI. Whirlpool Financial Corp., 154 T.C. No. 9 (5/5/20).

IRS PROCEDURE

Oil recovery and marginal production reference price published

The IRS published the reference price under Sec. 45K(d)(2)(C) for calendar year 2019. The reference price applies in determining the amount of the Sec. 43 enhanced oil recovery credit, the Sec. 45I marginal well production credit, and the Sec. 613A percentage depletion in case of oil and natural gas produced from marginal properties. Notice 2020-28 (5/4/20).

2020 marginal production depletion percentage is 15%

The IRS announced that the applicable percentage for purposes of determining percentage depletion on marginal properties for calendar year 2020 is 15%. Notice 2020-30 (5/4/20).

Adjustment factor and phaseout amount for the 2020 enhanced oil recovery credit

The IRS announced the inflation adjustment factor and phaseout amount for the enhanced oil recovery credit for tax years beginning in calendar year 2020. Because the reference price for the 2019 calendar year ($55.55) exceeds $28 multiplied by the inflation adjustment factor for the 2019 calendar year ($28 multiplied by 1.7640 = $49.392) by $6.16, the enhanced oil recovery credit for qualified costs paid or incurred in 2020 is phased out completely. Notice 2020-31 (5/4/20).

IRS addresses approval requirement for certain tax-exempt bonds during pandemic

The IRS issued temporary guidance regarding the public approval requirement under Sec. 147(f) for tax-exempt qualified private activity bonds. Specifically, in light of the COVID-19 pandemic, the guidance provides that hearings held by teleconference as described in Section 4.01 of the guidance will be treated as held in a location that, based on the facts and circumstances, is convenient for residents of the approving governmental unit for the purpose of Regs. Sec. 1.147-1(d)(2). Rev. Proc. 2020-21 (5/4/20).

TAX ACCOUNTING

Expanded temporary rule allows governmental issuers to purchase own tax-exempt bonds

The IRS is temporarily expanding the circumstances and time periods in which a tax-exempt bond that is purchased by its state or local governmental issuer is treated as continuing in effect without resulting in a reissuance or retirement of the purchased tax-exempt bond solely for purposes of Sec. 103 and Sec. 141 through Sec. 150. The IRS said that, in recognition of the need for liquidity and stability in the markets, including the short-term tax-exempt bond market, during the current period of economic disruption, it is expanding the time periods during which governmental issuers may purchase and hold their own tax-exempt qualified tender bonds and tax-exempt commercial paper. Notice 2020-25 (5/4/20).

Safe harbors are provided for distributions declared by certain REITs or RICs

The IRS issued temporary guidance regarding the treatment of certain stock distributions by publicly offered real estate investment trusts (REITs) and publicly offered regulated investment companies (RICs) under the Internal Revenue Code. Specifically, in recognition of the need for enhanced liquidity during the current period of economic disruption, the temporary guidance modifies the safe harbor provided in Rev. Proc. 2017-45 by temporarily (from April 1 to Dec. 31, 2020) reducing the minimum required aggregate amount of cash that distributee shareholders may receive to not less than 10% of the total distribution in order for Sec. 301, by reason of Sec. 305(b), to apply to that distribution. Rev. Proc. 2020-19 (5/4/20).

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal..

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