Document Summaries for the Week of Jan. 16, 2017

C CORPORATIONS

Safe harbor under Sec. 118 provided for certain amounts received under DOT programs

IRS issued a revenue procedure that provides a safe harbor under Sec. 118(a), which treats amounts received by corporate taxpayers under certain Department of Transportation programs as contributions to capital. The new procedure clarifies Rev. Proc. 2010-46. Rev. Proc. 2017-22 (1/18/17). 

EMPLOYEE BENEFITS

IRS describes CPEO procedures and requirements

The IRS described the requirements for a certified professional employer organization (CPEO) to maintain its certification and procedures relating to suspension and revocation of certification. Rev. Proc. 2017-14 (1/17/17).

ESTATES, TRUSTS & GIFTS

Same-sex married couples can recompute marital exclusion amounts

The IRS provided procedures for same-sex married couples to recompute the estate or gift tax applicable exclusion amount and the generation-skipping transfer tax exemption amount in light of the Supreme Court’s decision in Windsor, 133 S. Ct. 2675 (2013). Notice 2017-15 (1/17/17) (see related news story).

Final regs. address modified carryover basis rules for 2010 decedents

The IRS issued final regulations on the application of the Sec. 1022 modified carryover basis rules. The final regulations modify various regulatory provisions involving basis rules by including a reference to Sec. 1022 where appropriate. The regulations affect property transferred from certain decedents who died in 2010. T.D. 9811 (1/19/17).

INDIVIDUALS

IRS cannot regroup doctor’s activities; passive income can offset passive losses

The Tax Court held that a doctor and his wife could treat the doctor’s income from his minority interest in a partnership, which owned a surgery facility where he performed surgeries but had no day-to-day management responsibilities, as passive for the years as issue. The Tax Court rejected the IRS’s attempt to recharacterize the income as nonpassive and regroup the doctor’s activities, and, as a result, the passive income could absorb unrelated passive activity losses. Hardy, T.C. Memo. 2017-16 (1/17/17).

Phaseout reduces couple’s rental real estate losses

The Tax Court held that a couple’s rental real estate losses were limited by the Sec. 469(i)(3)(A) phaseout of the loss limitation. The court also concluded that the couple had not established that any of their Schedule C expenses were paid or incurred or that the expenses were ordinary and necessary. Oatman, T.C. Memo. 2017-17 (1/17/17).

IRS adds new hardship exemption from individual shared-responsibility payment

The IRS issued guidance that adds an additional hardship exemption from the individual shared-responsibility payment under Sec. 5000A. Individuals eligible for the health coverage tax credit (HCTC) who are not enrolled in HCTC-qualifying health insurance coverage for one or more months between July and Dec. 2016 may claim a hardship exemption without obtaining a hardship exemption certificate. The notice supplements Notice 2014-76. Notice 2017-14 (1/18/17).

IRS grants extension for taxpayers to elect health coverage tax credit

The IRS issued guidance providing that a health coverage tax credit (HCTC) election for a month in 2016 may be made at any time before the expiration of the three-year statute of limitation under Sec. 6511 for the year, including on an amended income tax return. This extension of time is provided because, prior to its expiration, the HCTC did not require an election and the Treasury Department and the IRS are concerned that eligible taxpayers may not be aware of the requirement to affirmatively elect the HCTC for coverage provided in 2016. Notice 2017-16 (1/19/17).

Discharge of indebtedness relief provided for student loans relating to schools owned by American Career Institutes

The IRS released a revenue procedure that grants relief from discharge of indebtedness income for taxpayers whose federal student loans taken out to attend a school owned by the American Career Institutes Inc. are discharged by the Department of Education under the “Closed School” or “Defense to Repayment” discharge process. The revenue procedure also provides that the IRS will not assert that the entity discharging these loans has an information reporting requirement. Rev. Proc. 2017-24 (1/19/17).

Chief Counsel’s Office addresses tax treatment of certain indemnity health plans

The Office of Chief Counsel advised that an employer may not exclude from an employee’s gross income payments under an employer-provided fixed-indemnity health plan if the value of the coverage was excluded from the employee’s gross income and wages. Further, an employer may not exclude from an employee’s gross income payments under an employer-provided fixed-indemnity health plan if the premiums for the fixed-indemnity health plan were originally made by salary reduction through a Sec. 125 cafeteria plan. CCA 201703013 (1/20/17).

IRS proposed changes affecting dependents

Proposed regulations would make a variety of changes to the definition of “dependent” in the regulations to reflect statutory changes that have been made to the dependency exemption and would change the IRS’s position on when taxpayers may qualify as childless for purposes of the Sec. 32 earned income tax credit. REG-137604-07 (1/19/17) (see related news story).

INTERNATIONAL

Notice modifies effective dates of foreign currency gain or loss deferral rule

The IRS modified the effective dates of the rule under Temp. Regs. Sec. 1.987-12T (published in December 2016 in T.D. 9795) to apply to deferral events or outbound loss events that occur as a result of an entity classification election made under Regs. Sec. 301.7701-3. Notice 2017-7 (1/17/17).

IRS issues QI withholding agreement

The IRS set forth the final qualified intermediary (QI) withholding agreement that foreign persons may enter with the IRS under Regs. Sec. 1.1441-1(e)(5) to simplify their obligations as withholding agents under Code Chapters 3 and 4 and as payers under Chapter 61 and Sec. 3406 for amounts paid to their account holders. Rev. Proc. 2017-15 (1/17/17).

IRS publishes FATCA agreement for foreign financial institutions

The IRS issued an agreement under the Foreign Account Tax Compliance Act (FATCA) that foreign financial institutions (FFIs) can enter into with the IRS to be treated as a participating FFI under Sec. 1471(b) and Regs. Sec. 1.1471-4. Rev. Proc. 2017-16 (1/17/17).

Regs. treat certain foreign-owned disregarded entities as domestic corporations

Final regulations treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation separate from its owner for the limited purposes of the reporting, record maintenance, and associated compliance requirements that apply to 25% foreign-owned domestic corporations under Sec. 6038A. T.D. 9796 (1/17/17).

IRS issues guidance on early filing of Form 8975 for parent entities of multinational enterprise groups

The IRS issued a revenue procedure that provides that ultimate parent entities of U.S. multinational enterprise (MNE) groups may file a Form 8975, Country-by-Country Report, for reporting periods that are earlier than the applicability date of Regs. Sec. 1.6038-4 and that begin on or after Jan. 1, 2016. The revenue procedure discusses the timing and manner of these early filings. Rev. Proc. 2017-23 (1/19/17). 

IRS PROCEDURE

Erroneous credit to taxpayer’s account prevents statute of limitation from expiring

The Tax Court held that an erroneous credit by the IRS to a taxpayer’s 2006 account was not an erroneous refund for purposes of Sec. 7405. As a result, the court concluded that the statute of limitation within which the IRS could collect the taxpayer’s unpaid assessed 2006 liability had not expired. Schuster, T.C. Memo. 2017-15 (1/17/17).

IRS updates safe-harbor for private business use of property financed with governmental tax-exempt bonds

The IRS issued updated safe-harbor conditions under which a management contract does not result in private business use of property financed with governmental tax-exempt bonds under Sec. 141(b) or cause the modified private business use test for property financed with qualified Sec. 501(c)(3) bonds under Sec. 145(a)(2)(B) to be met. This safe harbor procedure supersedes Rev. Proc. 2016-44. Rev. Proc. 2017-13 (1/17/17).

IRS issues February 2017 AFRs

The IRS issued the applicable federal rates for the month of February 2017. Rev. Rul. 2017-4 (1/18/17). 

MISCELLANEOUS

IRS updates certain insurance contracts’ prevailing state-assumed interest rates

The IRS issued a ruling that updates, for certain insurance contracts issued in 2016 and 2017, the prevailing state-assumed interest rates by which life insurance companies compute certain reserves for federal tax purposes. The ruling supplements parts of Rev. Rul. 92-19. Rev. Rul. 2017-3 (1/17/17).

IRS provides safe harbor procedure relating to certain energy savings performance contract sales agreements

The IRS issued a revenue procedure that provides a safe harbor under which it will respect certain energy savings performance contract (ESPC) energy sales agreements (ESAs) for the sale of electricity by an energy service company (ESCO) to a federal agency as a service contract under Sec. 7701(e)(3). The revenue procedure also provides an example of an ESPC ESA. Rev. Proc. 2017-19 (1/19/17).

PARTNERSHIPS

New rules on transfers of property to partnerships with foreign partners

The IRS issued temporary regulations that address transfers of appreciated property by U.S. persons to partnerships with foreign partners related to the transferor. T.D. 9814 (1/19/17)

IRS proposes centralized partnership audit rules

The IRS issued proposed regulations that implement the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015, P.L. 114-74. REG-136118-15 (1/19/17) (see related news story).