Developments in individual taxation

By David R. Baldwin, CPA; Robert Caplan, CPA; Mary Kay Foss, CPA; Shannon Hudson, CPA; David H. Kirk, CPA/PFS; Frank Lin, CPA; Dana McCartney, CPA; and Darren Neuschwander, CPA



  • Final regulations were issued clarifying the definition of qualifying child and qualifying relative for child tax credit and other tax purposes.
  • The IRS provided guidance on pandemic-related payments under an employer leave-based donation program in a notice, and in two other notices provided procedures for taxpayers taking early distributions and loans from retirement plans as permitted by Section 2202 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
  • The IRS Chief Counsel's office advised that an amount paid to participate in a daily fantasy sports contest is an amount paid for a wagering transaction.
  • Final regulations were promulgated related to amendments made to Sec. 402(c) by the law known as the Tax Cuts and Jobs Act (TCJA) that provide an extended rollover deadline for qualified plan loan offset amounts.
  • IRS guidance clarified the requirement for employers to provide employees who are also self-employed with information necessary for properly claiming qualified sick leave equivalent or qualified family leave equivalent credits under the Families First Coronavirus Response Act (FFCRA).

This article is a semiannual review of recent developments in the area of individual federal taxation. It covers cases, rulings, and guidance on a variety of topics issued during the six months ending November 2020. The items are arranged in Code section order.

The IRS issued Rev. Proc. 2020-45, which provides the 2021 dollar amounts for most Code sections that are adjusted annually by inflation. In addition to the updated tax rate tables, new figures are added for the kiddie tax, capital gains rate, adoption credit, child tax credit, lifetime learning credit, and earned income tax credit. The revenue procedure also takes into account increased penalties in the SECURE Act,1 the updated estate tax exclusion amount, and many other figures.

Sec. 24: Child tax credit

Credit applies to qualifying relative: Under the law known as the Tax Cuts and Jobs Act (TCJA),2 Sec. 24 was amended to temporarily provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children. Proposed regulations were published in June 2020 and finalized in October 2020.3 The regulations clarify an issue raised regarding a statutory cross-reference in Sec. 24(h)(4) to "a qualifying child described in subsection (c)." The regulations clarify (in Regs. Sec. 1.24-1) that the statutory cross-reference is a reference to the definition of qualifying child in Sec. 24(c), rather than the definition of qualifying child in Sec. 152(c).

Child must be a qualifying child: In Bethune,4 the Tax Court denied the child tax credit the noncustodial parent claimed for her two children because Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, was not attached to her return. She relied on the divorce agreement's indication that she could claim the exemption. Although her husband signed the form shortly before she filed her petition in Tax Court, he had claimed the children on his return. Without Form 8332's being attached to her return, neither child was considered qualifying.

A similar result was reached in Bidzimou.5 The taxpayer was the noncustodial parent who was awarded tax exemptions by the divorce settlement but did not obtain Form 8332.

Sec. 32: Earned income tax credit

Qualifying children: In Brzyski,6 the Tax Court denied the taxpayer the earned income tax credit (EITC). For purposes of the credit, he claimed as qualifying children his fiancée's children. He claimed to have married the fiancée over dinner in Kansas, a state that allows common law marriage, unlike Missouri and California — the two states where the taxpayer resided. The court found that the children were not qualifying children of the taxpayer and, in addition, it found he was not entitled to the credit as a taxpayer without qualifying children because his earned income exceeded the phaseout threshold for a credit for that status.

Sec. 36B: Premium tax credit

Final regulationsThe IRS released final regulations7 under Secs. 36B and 6011 that clarify that the TCJA's elimination of the personal exemption does not affect one's ability to claim the premium tax credit. The guidance in Notice 2018-84 was incorporated in the final regulations. Proposed regulations issued in May 2020 were not changed.8

2021 inflation adjustmentsThe IRS issued Rev. Proc. 2020-36 with indexing adjustments for some provisions of the premium tax credit. The applicable percentage table and required contribution percentage (now 9.83%) were updated by this revenue procedure, effective for plan years beginning in 2021.

Excess advance premium tax credits: In Abrego,9 the taxpayers purchased medical insurance because they expected a refund due to the premium tax credit although they were eligible for Medicare. Their tax return was delinquent and did not include Form 8962, Premium Tax Credit, or claim a deduction for self-employed medical insurance premiums. The IRS determined that the taxpayers were not entitled to a premium tax credit and were thus required to pay back the entire advance premium tax credit they received.

The court allowed the taxpayers to apply the self-employed medical insurance deduction to the premium tax credit, which reduced the taxpayers' household income below 400% of the federal poverty line (398%). Therefore, they were entitled to a portion of the premium tax credit claimed on their original tax return. While the excess advance premium tax credit they received was calculated by the court to be almost $3,400, it held they were only required to pay back $2,500 of the excess because their household income was more than 300% but less than 400% of the applicable federal poverty line.

Sec. 61: Gross income defined

Leave-based donation program under COVID-19 pandemic: In Notice 2020-46, the IRS provided guidance on payments under an employer leave-based donation program to aid victims of the ongoing COVID-19 pandemic. Generally, under a leave-based donation program, an employee may choose to forgo his or her vacation, sick, or personal leave to allow his or her employer to make a cash payment to a Sec. 170(c) organization and have that amount excluded from his or her gross income. Employees electing to exclude the income may not claim a Sec. 170 charitable deduction for the value of the leave. Employers that make those cash payments may deduct them as either Sec. 170 charitable contributions or Sec. 162 business expenses, depending on whether they otherwise meet the requirements of those sections.

In response to the COVID-19 pandemic, employer payments under a leave-based donation program may be excluded from employees' gross income if they are (1) made to the Sec. 170(c) organization for the relief of victims of the COVID-19 pandemic in the affected geographic area and (2) paid to the Sec. 170(c) organizations before Jan. 1, 2021.

Income received considered compensation, not a loan: In Novoselsky,10 the Tax Court upheld the IRS's determination that upfront "litigation support" payments the taxpayer, a class action litigation attorney, received were includible in his gross income. The taxpayer argued that the payments were nontaxable loans because he was obligated to repay them out of his attorney's fees award if the litigation was successful.

The IRS argued, and the Tax Court agreed, that since the taxpayer had no obligation to pay counterparties anything if the litigation were unsuccessful, he did not have an unconditional obligation to repay the amounts paid to him, and therefore the payments could not be classified as a loan. Instead, the payments were compensation for services expected to be rendered. Furthermore, the classification of the payments as a loan failed under the multifactor test because the parties did not treat the payments as loans and there was no formal promissory note, fixed repayment schedule, stated interest rate, collateral or security, or payment of principal or interest.

Sec. 67: 2% floor on miscellaneous itemized deductions

In McKenny,11 the court dealt with whether legal fees incurred by the taxpayer were a business deduction or a miscellaneous itemized deduction. The legal fees were related to the taxpayer's malpractice lawsuit against his accountant arising out of advice regarding structuring his business as an S corporation. To determine the proper characterization of the expenses, the court applied the origin-of-the-claim doctrine, under which the characterization of an expense is determined by reference to "the origin and character of the claim with respect to which an expense was incurred."

Though the court noted that the lawsuit was "related to" and "regarding" the business operations, it determined that the lawsuit was personal in character and origin since the taxpayer brought the suit, not the business, and the malpractice claim alleged malpractice as to the services provided to the taxpayer, not the business. In short, the court stated, the lawsuit's main contention was that the accountant failed to help the taxpayer reduce his personal tax liability, not that the accountant failed to adequately support the business's income-producing activities. As personal expenses of the taxpayer, the legal expenses were miscellaneous itemized deductions deductible to the extent that they exceeded 2% of the taxpayer's adjusted gross income (AGI).

Sec. 72: Annuities; certain proceeds of endowment and life insurance contracts

Trust as ownerAn insurance company asked for guidance in interpreting Secs. 72(q) and 72(u) when the owner of an annuity is a grantor trust or a nongrantor trust.12 Sec. 72(q) provides a 10% addition to tax similar to Sec. 72(t) and with similar exceptions. Sec. 72(u) provides that an annuity owner that is not an individual reports annuity income as it is earned rather than when paid and was enacted to discourage expected abuses with deferred compensation. The ruling held that a grantor trust is treated as an individual owner for Secs. 72(p) and 72(u) purposes. Thus, the 10% addition to tax under Sec. 72(p) does not apply at the annuitant's death, and benefits will be taxed when paid and not when accrued under Sec. 72(u) for a grantor trust.

When a nongrantor trust is the annuity owner, some of the exceptions to the Sec. 72(p) penalty will not apply, but the 10% addition to tax will not apply at the death of the primary annuitant. The ruling also held that Sec. 72(u) treatment will not apply when the annuity is held by a nongrantor trust and not issued in an employment context.

Sec. 72(t) penaltyAfter the taxpayer in Seril,13 who was under age 59½ at the time, received a letter from a college her son wanted to attend, estimating the costs for her son's freshman year, she withdrew the total in two 2016 distributions. She claimed that the Sec. 72(t)(2)(E) higher education exception from the Sec. 72(t)(1) additional 10% tax applied to the part of the distributions used to pay her sons college costs, and, although the taxpayer never attempted to roll over any part of the distributions, $15,000 of the distributions should be excluded from her income because she intended to roll over that amount.

The Tax Court, however, after reviewing the evidence, held that only a small portion of the amount she withdrew from the IRA was used to pay her son's college expenses and qualified for the higher education exception to the 10% additional tax. The court also held she was subject to regular income tax on all of the withdrawals because she failed to prove she attempted to roll over those amounts until she received an IRS deficiency notice years later.

Additional tax on early distributions from qualified retirement plans under COVID-19 pandemic: In Notice 2020-50, the IRS provided procedures to those taxpayers taking early distributions and loans from retirement plans as permitted by Section 2202 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.14 Under Section 2202 of the CARES Act, qualified individuals receive favorable tax treatment for coronavirus-related distributions from eligible retirement plans.

A qualified coronavirus-related distribution is not subject to the 10% additional tax under Sec. 72(t), is includible in income ratably over three years, and will be treated as though it were paid via direct rollover to an eligible retirement plan if the distribution is eligible for tax-free rollover treatment and then recontributed to an eligible retirement plan within a three-year period beginning on the day after the date on which the distribution was received. Taxpayers can elect to report all the income in 2020; in that case they could recover taxes paid if the amount is recontributed timely.

These distributions must have been be made on or after Jan. 1, 2020, and before Dec. 31, 2020, and shall not exceed $100,000.

Sec. 163: Interest

In McCarthy,15 the Tax Court dealt with the deductibility of mortgage interest. The court thoroughly reviewed both what is a qualified principal residence under Sec. 121 and the Sec. 280A rules for a second residence. As the court noted, determining whether a property is a principal residence depends upon all facts and circumstances under the regulations. The court discussed that the rental of the property after the taxpayer moved out does not necessarily mean that the property ceases to be the taxpayer's principal residence. The lack of a ready market for selling the property may be taken into account such that the rental may be considered subordinate to the intent to sell the property at the earliest date and, thus, the property remains the principal residence for Sec. 121 purposes.

The court noted that the regulations also include the following factors to be considered in determining a taxpayer's principal residence: (1) the taxpayer's place of employment; (2) the principal place of abode of the taxpayer's family members; (3) the address listed on the taxpayer's federal and state tax returns, driver's license, automobile registration, and voter registration card; (4) the taxpayer's mailing address for bills and correspondence; (5) the location of the taxpayer's banks; and (6) the location of religious organizations and recreational clubs with which the taxpayer is affiliated.

Under Sec. 280A(d)(1), a dwelling unit is used as a residence if the taxpayer uses it for "personal purposes" for more than the greater of 14 days or 10% of the number of days during the tax year that the unit is rented at a fair value rental. Though the facts in this case were very unsupportive of the taxpayer's claims, the case is a good reminder that not all mortgage interest is "qualified residence interest" and that the facts and circumstances should be reviewed before taking mortgage interest as an itemized deduction.

On a final note, the court also reminded that if a married taxpayer files married filing separately, the taxpayer is only entitled to deduct mortgage interest from one residence unless both individuals consent in writing to the taxpayer's taking interest deductions into account for the principal residence and one other residence.

Sec. 165: Losses

Gambling lossesIn a legal memorandum, the IRS discussed Sec. 165(d) wagering losses (which can be deducted to the extent of wagering gains) and concluded that daily fantasy sports contests fit within the definition of wager.16 The memorandum was issued because the statute does not define wagering.

Rental property saleThe Tax Court held that a taxpayer could not deduct a loss from the sale of a former vacation home converted to a rental property. In Duffy,17 the court did not determine whether the property qualified as a rental, because, even it did, the taxpayers had not established that the fair market value (FMV) of the property when it was converted to a rental was greater than the amount realized on the sale.

Sale of residence converted to rentalThe Tenth Circuit heard the appeal of the Tax Court's Langston decision.18 The case presented a number of issues, one of which was a loss on the sale of the personal residence that the taxpayers claimed as a rental. The property was purchased in 1997 and underwent continuous renovations from 2001—2004. In 2005, they moved out of the property and began more renovations. In 2008, they purchased a new home while the renovations were continuing. In 2010, the renovations were complete, but the property remained empty. In 2011, their insurance agent told them the homeowner's insurance would be canceled, so they attempted to rent the property. The property was rented to an acquaintance at about 20% of fair market rent because he only used the property five days a month. A year later, the property was sold at a loss. The appellate court agreed with the Tax Court that the taxpayers had not proved that the property had been converted to income-producing purposes and the taxpayers could not take a loss on its sale.

Theft losses: In Giambrone,19 two brothers challenged the disallowance of theft loss deductions on their 2012 tax returns; the IRS moved for partial summary judgment on the matter, and it was granted by the Tax Court. The brothers founded a community bank in Illinois that they owned through a holding company. To raise capital, the holding company entered into an agreement with a Florida corporation that took over most of the ownership of the holding company. The majority shareholder of the Florida corporation (Farkas) took over management of the bank and the holding company. The Florida corporation caused the bank to purchase mortgage loans of the corporation in exchange for Federal Home Loan Mortgage Corporation escrow deposits. The bank was shut down by the Office of Thrift Supervision and placed into receivership by the FDIC. Farkas was subsequently indicted for bank fraud and numerous related crimes in 2010. In 2011, he was convicted and sent to prison. The Giambrone brothers relied on Rev. Proc. 2009-20 in determining the theft losses claimed in 2012. The IRS was granted summary judgment because Rev. Proc. 2009-20 allows for loss treatment in the discovery year, which was 2010, not 2012.

Sec. 170: Charitable, etc., contributions and gifts

In an unusual win for the taxpayer, the Tax Court in Emanouil20 allowed an appraisal for a conservation easement charitable deduction to be a "qualified appraisal" even though it did not include a statement explicitly indicating that it was prepared for income tax purposes and it did not include the date of the contribution. The court found that the taxpayer was in "substantial" compliance with the requirements in the regulations and did not require "strict" compliance. Ultimately, the court determined that the appraisal "provided sufficient information to permit the IRS to evaluate the reported contributions and to investigate and address concerns about overvaluation and other aspects of the reported charitable contributions."

In several cases on conservation easements, the Tax Court considered whether the easements met the protected-in-perpetuity requirements under Sec. 170(h)(5)(A).21 In all of them, the court ruled that the perpetuity requirement was not met because the deeds failed to allocate the extinguishment proceeds in accordance with the regulations. Under the regulations, when an easement is extinguished by judicial proceedings, the donee must have a property right with an FMV that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at the time of donation and that the donee's proportionate value of the property rights must remain constant. In all the cases, the court ruled that the subtraction of the appreciation value related to pre- or post-easement improvements could reduce the proportionate value the donee would receive upon a judicial extinguishment and, thus, did not strictly comply with Regs. Sec. 1.170A-14(g)(6).

Sec. 213: Medical, dental, etc., expenses

Medical expenses: The Tax Court held in Sham22 that the taxpayer was only entitled to deduct $44,255 of payments for qualified medical expenses as itemized deductions in tax year 2010. The court disallowed $436 spent on aromatic oils and $2,870 paid to an individual who assisted the taxpayer after she had major surgery. The taxpayer argued that the edible aromatic oils were prescribed to her and that the assistant directly helped with medical treatment throughout the year. The court disallowed the expenses for the edible aromatic oils because the taxpayer could not prove the oils were prescribed by a medically licensed professional. The assistant is not a medically licensed professional, so the fees paid to her were also not deductible. Additionally, $10,149 of the total medical expenses for the year were reimbursed by her health insurer and therefore were not deductible.

Self-employment: The Tax Court held in Thoma23 that the taxpayers were not entitled to deduct $4,648 and $5,580 of medical expenses in 2010 and 2011, respectively, as self-employed health insurance deductions. The taxpayers argued that Thoma was self-employed in 2010 and 2011 and the returns correctly claimed the deductions under Secs. 62(a)(1) and 162(1). The court disallowed the self-employed health insurance deduction because Thoma was an employee of an accounting firm in 2010 and 2011 and not self-employed. However, the notice of deficiency determined the amounts were allowable as itemized deductions for medical expenses subject to the 7.5%-of-AGI floor each year, under Sec. 213(a).

Sec. 215: Alimony, etc. payments [repealed]

The Tax Court held in Matzkin24 that the taxpayer was not entitled to a deduction for payments made to his former wife under a court-ordered property settlement through which his former wife received an equitable share of the marital assets.25 The taxpayer argued that the payments were for "spousal support" as part of the divorce agreement and deductible as an alimony payment. However, after reviewing the couple's marital settlement agreement and the negotiating history of the agreement, the court determined that the payments were lump-sum alimony payable in installments in the nature of a property settlement that were not deductible. The court also held that the payments did not increase the taxpayer's basis in the limited liability company his S corporation owned.

Sec. 401: Qualified pension, profit-sharing, and stock bonus plans

Trust as designated beneficiaryThe IRS clarified in a letter ruling that a trust qualified as a "designated beneficiary" of a decedent's IRAs and that the surviving spouse's life expectancy would be used for required minimum distributions (RMDs).26The decedent died before 2020, and the ruling stated that the SECURE Act did not apply. In addition, the decedent had not reached his required beginning date (RBD), and the spouse was not entitled to trust income annually but could request distributions of income and principal. There was no mention of a qualified terminable interest property trust.

Division of beneficiary trust: In another ruling for an IRA beneficiary trust, each child who was a beneficiary of the trust was ruled to be a designated beneficiary of a decedent's IRA.27 The decedent died after her RBD with five children. Permission was granted to divide the beneficiary trust into five trusts, one for each child without the transfers being treated as taxable distributions. All the subtrusts had to use the life expectancy of the oldest child.

Direct transfers to beneficiary IRAs: Some custodians want to transfer ownership of an IRA to the estate of the decedent when the estate is named or no beneficiary is named for an IRA. The estate's beneficiaries often have difficulty receiving the IRA directly as a beneficiary IRA from an estate-owned IRA. A series of recent rulings have allowed some direct transfers. In the first one, the IRS ruled that an IRA with no named beneficiary could be distributed to those individuals who were to inherit from the decedent's estate.28 The decedent died after her RBD, so the estate beneficiaries had to take RMDs based upon the decedent's life expectancy. The decedent's IRA was transferred directly to each heir's beneficiary IRA account, and the transfers were not treated as taxable distributions.

In Letter Ruling 202039002, a similar result was reached when the decedent's estate was named the beneficiary of two IRAs. Each of three beneficiaries was to receive RMDs based upon the decedent's remaining life expectancy after a direct transfer from the decedent's IRAs to the beneficiary IRAs. Beneficiaries under a decedent's will were allowed to receive transfers from the decedent's IRA to their beneficiary IRAs in Letter Ruling 202031007. Again, RMDs for the estate beneficiaries were based upon the remaining life expectancy of the decedent. The SECURE Act would not change the result for these three rulings.

Life expectancy tablesThe IRS issued proposed regulations in November 2019 to update the life expectancy tables for RMDs as of 2021 in response to the Trump administration's directive to examine regulations. Those regulations were adopted29 with some changes, effective Nov. 12, 2020. The IRS will update Sec. 401(a)(9) regulations again to take into account the SECURE Act and update Rev. Rul. 2002-62, which provides tables for those using substantially equal periodic payments to avoid the Sec. 72(t) penalty. The final regulations go into effect in 2022 rather than 2021 as proposed.

Sec. 402: Taxability of beneficiary of employees' trust

Qualified plan loan offset amounts: The TCJA amended Sec. 402(c) to provide an extended rollover deadline for qualified plan loan offset (QPLO) amounts.30 The amount of employee loans under Sec. 72(p) that are offset against retirement benefits of a terminating employee can be contributed to an IRA or new employer qualified plan by the extended due date of the employee's return for the year of the offset. The extended time period also applies to loans offset at the termination of a current employer's qualified plan. The final regulations, which adopted the proposed regulations without change except for the effective date, provide Q&As regarding the provisions and make it clear that loan defaults during employment do not qualify for this relief. These regulations apply to plan loan offset amounts, including QPLO amounts, treated as distributed on or after Jan. 1, 2021. The rules in Regs. Sec. 1.402(c)-3 will first apply to a 2021 Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., which is required to be filed and furnished in 2022.

Taxpayers (including a Form 1099-R filer) may also apply these regulations to plan loan offset amounts, including QPLO amounts, treated as distributed on or after Aug. 20, 2020, the date the proposed regulations were issued.31

Rollover reliefIn 2016, the IRS issued Rev. Proc. 2016-47, which provided a process for taxpayers to certify that they had a valid reason for missing the 60-day rollover period for a qualified plan or IRA benefit. The revenue procedure listed 11 reasons that could be considered as valid for obtaining a waiver of the 60-day requirement. The IRS listed a new reason that is effective as of Oct. 16, 2020. Rev. Proc. 2020-46 modifies and updates Rev. Proc. 2016-47 to add "a distribution was made to a state unclaimed property fund" as a qualifying reason.

Although Rev. Proc. 2016-47 was released to stem the tide of letter ruling requests for 60-day rollover relief, that procedure and the $10,000 user fee have not eliminated the requests for relief. The Economic Growth and Tax Relief Reconciliation Act of 200132 required financial institution errors to be automatically given a waiver, and the IRS acknowledged this in Rev. Proc. 2003-16. However, the IRS continues to receive requests for relief under these circumstances. In two consecutive rulings,33 the IRS gave relief to taxpayers and their spouses who relied on a financial institution and financial adviser to complete a rollover. The funds instead were transferred to non-IRA accounts.

Relief was also granted to a taxpayer when his custodian resigned.34 He learned of the matter when he received an IRS CP 2000 letter. The taxpayer had moved to a new state, and the custodian's resignation letter assigning the investments to him personally was not forwarded.

A divorced woman was granted relief35 to move funds she had transferred from one financial institution to another institution's non-IRA account. She had not used the funds and requested relief because her ex-husband had always handled financial matters and the bank did not tell her that the transferred funds came from an IRA.

A taxpayer received telephone calls from city officials in a foreign country stating that she had committed a crime in that city. She was threatened with extradition and imprisonment; she wired funds from an IRA and another bank account to the individuals who had contacted her to demonstrate her innocence. She later contacted the foreign country's embassy and hired an attorney in that country to try to recover the funds. She was unable to retrieve the IRA funds within 60 days to complete a rollover. The IRS granted additional time to deposit funds in the IRA because she was the victim of an international fraud scheme.36

Using IRA funds for a short-term loan has never been condoned, and failure to repay within 60 days gets no relief from the IRS. A couple requested penalty relief when neither their realtor nor their lender made them aware of the repayment deadline on funds used to close the purchase of a new residence before escrow closed on the sale of their existing residence. The IRS said that the custodian is not obliged to inform customers of the rollover rules and the realtor and lender do not rise to the level of a financial institution.37

Sec. 408: Individual retirement accounts

Surviving spouses: In two letter rulings, the IRS allowed IRAs with trust beneficiaries to be rolled over by the surviving spouses. Because Sec. 408(d)(3) provides that inherited IRA benefits cannot be rolled over, the surviving spouses had to distinguish their situation from the Code provision.

Community property: In Letter Ruling 202034002, the decedent and taxpayer had created a trust in the community property state in which they resided. The trust was the beneficiary of the decedent's IRA. Under state law, the IRA was community property. The taxpayer was the trustee of the trust. The trust required that the IRA be allocated to the survivor's portion of the trust; she was entitled to 100% of the income and principal and could withdraw all of the trust assets. A tax-free rollover was allowed.

Sole beneficiary: In Letter Ruling 202040003, the decedent's IRA was payable to a trust. The taxpayer was the surviving spouse and sole beneficiary of the beneficiary trust. She was entitled to all of the income and principal of the trust and was allowed to perform a tax-free rollover.

Sec. 469: Passive activity losses and credits limited

In Eger,38 for the years 2007-2009, a married couple claimed that their vacation properties in Colorado, Mexico, and Hawaii were rental real estate activities, subject to the passive loss rules of Sec. 469. The taxpayers grouped these properties with 33 other rental activities into a single rental real estate activity to determine material participation.

The taxpayers entered into a management agreement with a third-party company, for which it was paid a portion of the rent for their rental properties, including the three vacation properties. The average length of stay for the vacation properties was less than seven days.

Upon examination, the IRS disallowed the taxpayers' grouping of these properties with the other rental properties for material participation purposes under Temp. Regs. Sec. 1.469-1T(e)(3)(ii)(A).

The taxpayers contended that these properties were rented to the management company, which had a contract that was for longer than seven days, and therefore these were rentals and not short-term vacation properties.

The Ninth Circuit upheld the IRS findings by looking to the "ordinary, contemporary, common meaning" of the term "customer," which is not defined in the Code. The court found the term "customer" was clearly intended to refer to individuals paying to stay at and use property; and agreements with a company indicating it would receive a percentage of rent received in exchange for management services showed that it acted as representatives, not customers.

The operating losses of these properties could not be grouped with the taxpayers' other rental real estate activity; furthermore, the material participation requirements of these three properties had to be met separately.

Sec. 1402: Self-employment tax

The IRS issued guidance to employers39 on the requirement to report the amount of qualified sick leave wages and qualified family leave wages paid to employees under the Families First Coronavirus Response Act (FFCRA).40 The FFCRA requires employers with fewer than 500 employees to provide paid sick leave or family or medical leave for their employees who miss work for various coronavirus-related reasons. The IRS stated that employers are required to report these amounts either in box 14 of Form W-2, Wage and Tax Statement, or on a separate statement and noted that the required reporting provides employees who are also self-employed with information necessary for properly claiming qualified sick leave equivalent or qualified family leave equivalent credits under the FFCRA. This reporting provides employees who are also self-employed with information necessary for properly claiming qualified sick leave equivalent or qualified family leave equivalent credits under the FFCRA.

Sec. 5000A: Requirement to maintain essential coverage

Challenges to PPACAOn Nov. 10, 2020, the Supreme Court heard a major challenge to the Patient Protection and Affordable Care Act (PPACA).41 The case was brought by Republican state officials who argued that when Congress in 2017 zeroed out the penalty for failure to maintain medical insurance, lawmakers rendered the entire law unconstitutional.42

In Bucholz v. Mnuchin,43the taxpayer made a constitutional claim that the PPACA shared-responsibility payment penalties violated his Fifth and Fourteenth Amendment rights because that portion of the PPACA is unconstitutional. The case was dismissed for lack of jurisdiction and lack of factual matter.

In Dierlam v. Trump,44 the plaintiff opposed the PPACA contraceptive mandate due to his religious beliefs. As the new Health and Human Services rules provide an exemption for individuals like Dierlam for moral objections to contraceptives, the Fifth Circuit ruled the matter moot. Dierlam also asked for a refund of shared-responsibility payments he made before the TCJA law change. The court vacated the lower court's ruling and remanded this claim, finding that the district court erred by dismissing that claim with prejudice.


1Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, P.L. 116-94.

2P.L. 115-97.

3REG-118997-19, finalized in T.D. 9913.

4Bethune, T.C. Memo. 2020-96.

5Bidzimou, T.C. Memo. 2020-85.

6Brzyski, T.C. Summ. 2020-25.

7T.D. 9912.


9Abrego, T.C. Memo. 2020-87.

10Novoselsky, T.C. Memo. 2020-68.

11McKenny, 973 F.3d 1291 (11th Cir. 9/1/20).

12IRS Letter Ruling 202031008.

13Seril, T.C. Memo. 2020-101.

14Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136.

15McCarthy, T.C. Memo. 2020-74.

16IRS Internal Legal Memorandum 202042015.

17Duffy, T.C. Memo. 2020-108.

18Langston, No. 19-9002(10th Cir. 10/2/20), appeal of Langston, T.C. Memo. 2019-19.

19Giambrone, T.C. Memo. 2020-145.

20Emanouil, T.C. Memo. 2020-120.

21Hewitt, T.C. Memo. 2020-89; Plateau Holdings, LLC, T.C. Memo. 2020-93; Lumpkin One Five Six, LLC, T.C. Memo. 2020-94; Village at Effingham, LLC, T.C. Memo. 2020-102; Riverside Place, LLC, T.C. Memo. 2020-103; Maple Landing, LLC, T.C. Memo. 2020-104; Englewood Place, LLC, T.C. Memo. 2020-105; Belair Woods, LLC, T.C. Memo. 2020-112; Cotttonwood Place, LLC, T.C. Memo. 2020-115; and Red Oaks Estates, LLC, T.C. Memo. 2020-116.

22Sham, T.C. Memo. 2020-119.

23Thoma, T.C. Memo. 2020-67.

24Matzkin, T.C. Memo. 2020-117.

25See Rood, T.C. Memo. 2012-122.

26IRS Letter Ruling 202044001.

27IRS Letter Ruling 202042012.

28IRS Letter Ruling 202031007.

29T.D. 9930.

30Section 13613 of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97.

31T.D. 9937.

32Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16.

33IRS Letter Rulings 202032009 and 202032010.

34IRS Letter Ruling 202023007.

35IRS Letter Ruling 202029006.

36IRS Letter Ruling 202044012.

37IRS Letter Ruling 202033008.

38Eger, 818 Fed. Appx. 751 (9th Cir. 8/13/2020), aff'g 405 F. Supp. 3d 850 (D.C. Cal. 2019).

39Notice 2020-54.

40Families First Coronavirus Response Act, P.L. 116-127.

41Patient Protection and Affordable Care Act, P.L. 111-148.

42California v. Texas, No. 19-840 (U.S. 11/10/20) (oral arguments).

43Bucholz v. Mnuchin, No. 19-1730 (ABJ) (D.D.C. 9/10/20).

44Dierlam v. Trump, No. 18-20440 (5th Cir. 10/15/20).



David R. Baldwin, CPA, is a partner with Baldwin Moffitt PLLC in Phoenix; Robert Caplan is a CPA at Caplan & Wong, CPAs, LLP, in San Mateo, Calif.; Mary Kay Foss, a CPA from Walnut Creek, Calif., is an instructor for CalCPA Education Foundation; Shannon Hudson, CPA, MST, is a founding partner of Altair Group PLLC in Bedford, N.H.; David H. Kirk, CPA/PFS, is a partner with Ernst & Young in Washington, D.C.; Frank Lin is a CPA with Jet Tax Services, a privately owned accounting firm in Queens, N.Y.; Dana McCartney, CPA, is a partner with Maxwell Locke & Ritter in Austin, Texas; Darren Neuschwander, CPA, is a managing member with Green, Neuschwander & Manning, a virtual CPA firm with members all over the country. Mr. Baldwin is the chair and the other authors are current members of the AICPA Individual & Self-Employed Tax Technical Resource Panel. To comment on this article or to suggest an idea for another article, contact


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