Just hours before government funding was set to expire, President Trump on March 23 signed the bipartisan Consolidated Appropriations Act, 2018, averting a government shutdown. The $1.3 trillion fiscal year 2018 omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions and increased IRS funding.

Just hours before government funding was set to expire, President Trump on March 23 signed the bipartisan Consolidated Appropriations Act, 2018, averting a government shutdown. The $1.3 trillion fiscal year 2018 omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions and increased IRS funding.

The House approved the spending bill by a 256-to-167 vote on March 22. The Senate cleared the measure by a 65-to-32 vote.

Grain Glitch
The so-called "grain glitch" addressed within the omnibus package aims to fix an unintended consequence in the "pass-through" income deduction. The deduction is provided in new Code Sec. 199A, which was enacted last December as part of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

Before the fix, grain and other agricultural products sold to cooperatives received a tax advantage because those sales were deductible from a farmer’s gross sales. Sales to companies other than cooperatives were deductible only from net business income. The inadvertent advantage had been given to cooperatives as part of a drafting error, according to several Republican lawmakers.

The appropriations bill repeals the provision in Code Sec. 199A that allowed farmers to deduct 20 percent of their gross sales to cooperatives. As modified, the deduction is now limited to 20 percent of farmers’ net income, excluding capital gains. "This legislation restores the competitive balance in the agricultural marketplace by leveling the tax burden on independent and cooperative farming businesses," Sen. Jerry Moran, R-Kan., said in a March 22 statement. The bill also modifies the deduction that is allowed to agricultural or horticultural cooperatives.

Low-Income Housing Tax Credit
Although Democrats have previously expressed an unwillingness to help Republicans correct issues within the new tax law, the parties agreed to the grain glitch fix in exchange for an expansion of the low-income house tax credit. The expansion is also included in the spending bill.

"This is the first increase in over a decade," Sen. Maria Cantwell, D-Wa., said on March 22. "Nearly $3 billion is a good start towards tackling the housing crisis in our cities and rural communities," she added. Cantwell spearheaded the efforts among Democrats for the credit’s expansion.

Technical Corrections
Numerous other technical corrections to previous tax bills spanning from 2004-2016 were included in the spending bill, none of which specifically address the TCJA. Included among the fixes are technical corrections to the partnership audit rules.

IRS Funding
The legislation provides the IRS with $11.43 billion in funding, close to $196 million more than currently enacted levels. $320 million is allocated specifically for implementation of the TCJA. The Trump administration had requested $397 million for implementation of the new tax law. According to Treasury Secretary Steven Mnuchin, the increased resources would provide an update to antiquated telephone systems and technology.

White House
President Trump rattled Capitol Hill on March 23 when he announced just hours before government funding was set to expire that he may not sign the government spending bill. Although Mick Mulvaney, Director of the Office of Management and Budget (OMB) said on March 22 that the President would sign the omnibus package, President Trump took to Twitter on March 23 to suggest otherwise. "I am considering a veto of the omnibus spending bill…," Trump said in a tweet.

While Trump did, in fact, wind up signing the spending bill, which tops 2,200 pages, he told reporters at the White House that he was "unhappy" to do so. Trump criticized the $1.3 trillion omnibus package for being the second largest in history. "I say to Congress, I will never sign another bill like this again. I’m not going to do it again. Nobody read it. It’s only hours old," Trump said.

The American Institute of CPAs (AICPA) has renewed its call for immediate guidance on new Code Sec. 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act ( P.L. 115-97). "Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations," the AICPA said in a February 21 letter to the Service.

The American Institute of CPAs (AICPA) has renewed its call for immediate guidance on new Code Sec. 199A. The AICPA highlighted questions about qualified business income (QBI) of pass-through income under the Tax Cuts and Jobs Act ( P.L. 115-97). "Taxpayers and practitioners need clarity regarding QBI in order to comply with their 2018 tax obligations," the AICPA said in a February 21 letter to the Service.

New Deduction
The Tax Cuts and Jobs Act created Code Sec. 199A. The deduction is temporary and begins this year.

Generally, qualified taxpayers may deduct up to 20 percent of domestic QBI from a partnership, S corporation or sole proprietorship. Congress put in place a limitation based on wages paid, or on wages paid plus a capital element, among other requirements. Certain service trades or businesses generally may not take advantage of the deduction but there are exceptions.

Almost immediately after passage of the new tax law, the AICPA and other tax professional groups urged on the IRS to move quickly on guidance. Recently, the National Society of Accountants (NSA) reported that the IRS would issue guidance on Code Sec. 199A this summer.

Immediate Concern
The AICPA identified several areas of immediate concern. They are:

• Definition of Code Sec. 199A qualified business income.
• Aggregation method for calculation of QBI of pass-through businesses.
• Deductible amount of QBI for a pass-through entity with business in net loss.
• Qualification of wages paid by an employee leasing company.
• Application of Code Sec. 199A to an owner of a fiscal year pass-through entity ending in 2018.
• Availability of deduction for Electing Small Business Trusts (ESBTs).

Services
The AICPA asked the IRS to describe what activities are included in the definition of a services trade or business. "The guidance should clarify that the definition of the term ‘accounting services’ includes any services associated with the determination of tax liabilities including preparation, tax planning, cost segregation services, services rendered with respect to tax credits and deductions, and similar consultative services,"the AICPA told the Service.

A top House tax writer has confirmed that House Republicans and the Trump administration are working on a second phase of tax reform this year. House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an interview that the Trump administration and House Republicans "think more can be done."

A top House tax writer has confirmed that House Republicans and the Trump administration are working on a second phase of tax reform this year. House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an interview that the Trump administration and House Republicans "think more can be done."

A Ways and Means spokesperson told Wolters Kluwer on March 15 that "there are opportunities in making individual tax cuts permanent, increasing innovation, [and] encouraging household savings."Confirmation that House GOP tax writers are mulling additional tax changes to the tax code comes just days after President Trump announced that he and House Republicans are very serious about working on a “phase-two” of tax reform. Trump quipped that Brady is the "king of tax cuts."

Individual Tax Cuts
Among expected changes, in particular, the temporary individual tax cuts enacted under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) could be made permanent, a Ways and Means spokesperson told Wolters Kluwer. For budgetary reasons, the cuts to individual tax rates and benefits were not made permanent under the new law. "While the tax cuts for families were long-term, they are not yet permanent, so we’re going to address issues like that," Brady said.

Criticism
Democratic lawmakers remain largely united in their criticisms of the TCJA. House Minority Leader Nancy Pelosi, D-Calif., criticized the new tax law in a March 15 news conference for "giving 83 percent of the benefits to the top 1 percent, ultimately raising taxes for 86 million middle-class families while contending that it's a middle-class tax cut."

To that end, across the U.S. Capitol, Senate Minority Leader Charles E. Schumer has said Democrats would be reluctant to work with Republicans in making any fixes to the new tax law unless Republicans would be willing to address Democrats’ concerns with the law, as well. "We don't have much of an inclination, unless they want to open up other parts of the tax bill that we think need changes, to just help them clean up the mess they made," Schumer said.

Looking Forward
"Mainstream optimism is at record levels, our economy is really gaining momentum and booming in a big way," Brady said. "We’re always looking to improve the tax code," he said, adding that lawmakers are currently considering new ideas for tax reform. "We think there are some good ones." Lawmakers will not combine additional tax reform measures with technical corrections to the existing TCJA, according to Brady, emphasizing that any significant changes to come will be new ideas.

The House Ways and Means Tax Policy Subcommittee held a March 14 hearing in which lawmakers and stakeholders examined the future of various temporary tax extenders post-tax reform. Over 30 tax breaks, which included energy and fuel credits, among others, were retroactively extended for the 2017 tax year in the Bipartisan Budget Act ( P.L. 115-123) enacted in February.

The House Ways and Means Tax Policy Subcommittee held a March 14 hearing in which lawmakers and stakeholders examined the future of various temporary tax extenders post-tax reform. Over 30 tax breaks, which included energy and fuel credits, among others, were retroactively extended for the 2017 tax year in the Bipartisan Budget Act ( P.L. 115-123) enacted in February.

Both Republican and Democratic lawmakers have varying views on specific temporary tax provisions, but in general, seem to have largely been in agreement that year-end tax extenders are not good policy. New to the discussion, however, is whether such provisions are worthwhile now that business tax rates have been lowered along with full and immediate expensing under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

New Path Forward
The Ways and Means Committee is "charting a new path forward on temporary tax provisions,"Chairman Kevin Brady, R-Tex., said in his opening statement. "Temporary measures are rarely good tax policy."

According to Brady, numerous tax extenders only exist because of the previously outdated tax code and high tax rates. But now that tax reform has been enacted, these temporary tax breaks may serve less of a purpose. "Starting now, we’re going to apply a rigorous test to these temporary provisions,"Brady said.

To that end, Tax Policy Subcommittee Chairman Vern Buchanan, R-Fla., said that any temporary tax provision determined as no longer necessary post-tax reform should be eliminated. And, as for those that continue to serve an important role and enhance tax reform, permanence should be considered.

Tax Policy Subcommittee ranking member Lloyd Doggett, D-Tex., also weighing in on the issue, said that any temporary tax provisions that will remain need to be paid for moving forward. Additionally, Doggett criticized Republicans for not holding enough hearings on the TCJA, as well as the specific tax extenders currently under review. Doing so, he added, would enable needed discussion on relevancy as well as pay-fors.

Panels
Witnesses at the hearing were grouped into four panels, three of which consisted of several representatives from various industries including fuel, energy, and real estate. The other included witnesses from several think tanks and research organizations.

Generally, industry stakeholders argued that many of these temporary tax breaks remain important, even after tax reform. Buchanan, however, repeatedly asked witnesses why additional incentives were needed after tax cuts and full expensing were provided through tax reform under the TCJA. Several Republican lawmakers, including Buchanan, stated that tax provisions only add to the uncertainty of the tax system.

Several industry witnesses argued, in essence, that not all tax extenders are created equally and should thus be evaluated individually. Barry Grooms, testifying on behalf of the National Association of Realtors, told lawmakers that the tax exclusion for forgiven mortgage debt is unique and should be made a permanent part of our tax law. "Since it was first added to the Internal Revenue Code in 2007, this provision has provided much-needed financial relief for millions of distressed households,"Grooms testified. This exclusion makes the tax system fairer, Grooms added, stating that it provides assistance to families experiencing hardships.

Policy
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told lawmakers that tax extenders are generally poor policy and that most should be allowed to sunset. According to MacGuineas, not only do tax extenders add to the federal deficit, the temporary nature of tax extenders makes it difficult for businesses and individuals to plan and invest. "To be sure, there are sometimes legitimate reasons for temporary tax policy – to respond to a natural disaster or economic downturn, to test effectiveness, or to provide transition relief – but most of the tax extenders are temporary simply to hide their budgetary cost," MacGuineas testifed.

Likewise, David Burton, senior fellow in economic policy at The Heritage Foundation, spoke to the costliness of tax extenders. Burton testified that 13 energy tax extenders are unwarranted. "At roughly $53 billion over ten years, the revenue lost from these provisions is substantial," Burton included in his written testimony. Additionally, Burton told lawmakers that tax extenders make the tax system less fair.

Seth Hanlon, senior fellow at the Center for American Progress, criticized Congress for not addressing tax extenders in the TCJA. Furthermore, Hanlon told lawmakers that tax extenders not only make the tax code more unstable and add to the federal deficit, but also complicate the IRS’s job during filing season.

"Congress should have ended the gimmicky routine on tax extenders long ago, and certainly should have done so in legislation that was billed as a once-in-a-generation tax reform," Hanlon testified. "But, better late than never."

The IRS has released Frequently Asked Questions (FAQs) to address a taxpayer’s filing obligations and payment requirements with respect to the Code Sec. 965 transition tax, enacted as part of the Tax Cuts and Jobs Creation Act ( P.L. 115-97). The instructions in the FAQs are for filing 2017 returns with an amount of Code Sec. 965 tax. Failure to follow the FAQs could result in difficulties in processing the returns. Taxpayers who are required to file electronically are asked to wait until April 2, 2018, to file returns so that the IRS can make system changes.

The IRS has released Frequently Asked Questions (FAQs) to address a taxpayer’s filing obligations and payment requirements with respect to the Code Sec. 965 transition tax, enacted as part of the Tax Cuts and Jobs Creation Act ( P.L. 115-97). The instructions in the FAQs are for filing 2017 returns with an amount of Code Sec. 965 tax. Failure to follow the FAQs could result in difficulties in processing the returns. Taxpayers who are required to file electronically are asked to wait until April 2, 2018, to file returns so that the IRS can make system changes.

In general, Code Sec. 965 imposes a one-time tax on the untaxed post-1986 foreign earnings of foreign subsidiaries of U.S. shareholders by deeming the earnings to be repatriated. The foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and remaining earnings are taxed at an 8 percent rate. The taxpayer may elect to pay the tax in installments over eight years.

Amounts must be reported by a U.S. shareholders of deferred foreign income corporation (DFIC) or by a direct or indirect partner in a domestic partnership, a shareholder in an S corporation, or a beneficiary of another passthrough entity that is a U.S. shareholder of a DFIC.

The Appendix to Q&A 2 contains a table that describes, separately for individuals and entities, how items should be reported on the 2017 tax return. For example, an individual reports the Code Sec. 965(a) amount on Form 1040, Line 21, with the notation SEC 965 on the dotted line to the left of the Line.

A person with income under Code Sec. 965 is required to include with its return an IRC 965 Transition Tax Statement, signed under penalties of perjury, and in the case of an electronically filed return, in pdf format with the filename 965 tax. A Model statement is provided. Adequate records must be kept supporting the Code Sec. 965 inclusion amount, the deduction under Code Sec. 965(c), the net tax liability under Code Sec. 965, and any other underlying calculations of these amounts.

The FAQs provide details on how to make the multiple Code Sec. 965 elections, including the election to pay the tax in installments over eight years. For each election, a statement must be attached to the return and signed under the penalties of perjury, and in the case of an electronically filed return, in pdf format.

Form 5471 must also be filed with the 2017 return of a U.S. shareholder of a specified foreign corporation, regardless of whether the specified foreign corporation is a controlled foreign corporation. A statement containing information about the Code Sec. 965(a) inclusion must be attached to the Schedule K-1s of domestic partnerships, S corporations, or other passthrough entities.

Tax must be paid in two separate payments. One payment will reflect the tax owed, without Code Sec. 965. The second payment is the Code Sec. 965 payment. Both payments must be made by the due date of the applicable return (without extensions). Additional details for paying the tax are provided in the FAQs.

Persons who have already filed a 2017 tax return should consider filing an amended return based on the information in these FAQs and Appendices.

The U.S. Supreme Court reversed an individual’s conviction for obstructing tax law administration. The government failed to show that the individual knew that a "proceeding" was pending when he engaged in the obstructive conduct.

The U.S. Supreme Court reversed an individual’s conviction for obstructing tax law administration. The government failed to show that the individual knew that a "proceeding" was pending when he engaged in the obstructive conduct.

Background
The individual owned and operated a freight service that transported items to and from the United States and Canada. The government charged the individual with violating the "omnibus clause" of Code Sec. 7212(a), which imposes criminal liability on anyone who "in any other way corruptly … obstructs or impedes, or endeavors to obstruct or impede, the due administration of" the Internal Revenue Code (Title 26).

The government alleged that the individual obstructed tax administration because he: (1) failed to maintain corporate books and records; (2) failed to provide his accountant with complete and accurate tax information; (3) destroyed business records; (4) was hiding income; and (5) was paying employees with cash. At trial, the jury was instructed that it must unanimously find that he corruptly engaged in one of the practices listed. However, the jury was not instructed that it had to find that the individual knew he was under investigation and intended to interfere with that investigation. Subsequently, the jury convicted the individual on all counts. Then, the Second Circuit Court of Appeals affirmed his conviction.

Tax Law Administration
The Supreme Court reversed and remanded. According to the Court, the verbs "obstruct" and "impede" require an object. Therefore, the taxpayer must hinder a particular person or thing. Moreover, the omnibus clause serves as a "catchall" for the obstructive conduct, not as a catchall for every violation that interferes with tax law administration.

Nothing in the statute’s history suggested that Congress intended the omnibus clause to apply to the entire Internal Revenue Code, including the routine processing of tax returns, tax payments and tax refunds. Further, if the omnibus clause applied to all tax law administration, many tax misdemeanors might turn into felonies and make specific criminal provisions in the Code redundant. Accordingly, the phrase "due administration of" the tax code referred only to some acts, not everything the IRS does.

Overly Broad Interpretation
A broad interpretation of the omnibus clause would also risk the lack of fair warning. Interpreted broadly, the provision could apply to a person who paid a babysitter in cash without withholding taxes, left a large cash tip in a restaurant, failed to keep donation receipts, or failed to provide every record to their accountant. Such individuals may know they are violating an IRS rule. However, they would not think they could be prosecuted for obstruction. Further, if Congress intended that outcome, it should have made that clear in the statute.

Government’s Argument
Further, the Court rejected the government’s argument that the need to show the obstructive conduct was corrupt cured any overbreath problem. However, a taxpayer who "willfully" violates the tax code intends someone to obtain an unlawful advantage. Moreover, relying upon prosecutorial discretion to narrow an otherwise overbroad statute puts too much power in the hands of the prosecutor, and risks undermining public confidence in the criminal justice system. Therefore, to secure a conviction under the omnibus clause, the government was required to show that there was a nexus between the individual’s conduct and an investigation, audit or other targeted administrative action.

Reversing and remanding a CA-2 decision 2016-2 ustc ¶50,453.

President Trump on February 9 signed the Bipartisan Budget Act into law after a brief government shutdown occurred overnight. The legislation contains tax provisions in addition to a continuing resolution to fund the government and federal agencies through March 23. The House approved this new law in the early morning hours of February 9, by a 240-to-186 vote. The Senate approved the bipartisan measure a few hours earlier, by a 71-to-28 vote.

President Trump on February 9 signed the Bipartisan Budget Act into law after a brief government shutdown occurred overnight. The legislation contains tax provisions in addition to a continuing resolution to fund the government and federal agencies through March 23. The House approved this new law in the early morning hours of February 9, by a 240-to-186 vote. The Senate approved the bipartisan measure a few hours earlier, by a 71-to-28 vote.

Take away. The Bipartisan Budget Act contains a significant number of tax provisions, including disaster tax relief and the extension of over 30 expired tax breaks. The majority of the tax relief included in the legislation applies for the 2017 tax year only. The full impact of these retroactive changes on the current filing season remains to be fully assessed. The IRS issued a statement on February 9 statement, saying that it was beginning to determine next steps. “The IRS will provide additional information as quickly as possible for affected taxpayers and the tax community,“ the Service indicated.

Comment

While many economists and lawmakers argue retroactive tax extenders are unfavorable tax policy, others contend that these tax breaks were included in the Bipartisan Budget Act because they had been relied upon and expected for the 2017 tax year but were squeezed out of year-end consideration by the Tax Cut and Jobs Act. A House Ways and Means Committee spokesperson told Wolters Kluwer that "[j]ob creators and families expected these extenders—in a pre-tax reform world—would be taken care of in a similar fashion as Congress has done for years." Moving forward, however, the committee is planning hearings to determine how and if tax extenders fit in post-tax reform years, the spokesperson added.

Extenders

Highlight of some of the tax extender provisions with more widespread impact than others are as follows (and are extended through 2017 only unless noted):

• Exclusion from gross income of discharge of qualified principal residence indebtedness;
• Mortgage insurance premiums treated as qualified residence interest;
• Above the line deduction for qualified tuition and related expenses;
• Election to expense mine safety equipment;
• Special expensing rules for certain productions;
• Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico;
• Special rule relating to qualified timber gain;
• Empowerment zone tax incentives;
• Credit for nonbusiness energy property;
• Credit for nonresidential energy property (extended through 2021 and modified);
• Credit for new qualified fuel cell motor vehicles;
• Credit for alternative fuel vehicle refueling property;
• Credit for 2-wheeled plug-in electric vehicles;
• Second generation biofuel producer credit;
• Biodiesel and renewable diesel incentives;
• Credits with respect to facilities producing energy from certain renewable resources;
• Credit for energy-efficient new homes;
• Energy credit (extended through 2021 and modified);
• Special allowance for second generation biofuel plant property;
• Energy efficient commercial buildings deduction; and
• Carbon dioxide sequestration credit (enhanced, modified and generally extended through 2023).

Disaster relief

The Bipartisan Budget Act also established disaster tax relief for individuals and businesses impacted by California wildfires. Such relief includes but is not limited to allowing certain access to retirement funds, temporarily suspending the limit on charitable contribution deductions, allowing deductions for personal casualty disaster losses and a tax credit for employee retention. The Act also includes changes to the Opportunity Zones rules for Puerto Rico, originally included in the "Tax Cuts and Jobs Act." Additionally, tax relief is extended for areas affected by hurricanes Harvey, Irma and Maria.

Additional tax provisions

A number of new tax provisions were included in the legislation, as well as modifications to existing tax provisions. These include modifications of the rules relating to whistleblower awards, user fees on installment agreements, and hardship distributions and withdrawals from deferred accounts. The Act also mandates the creation of a new version of Form 1040, similar to a Form 1040EZ, for seniors, for tax years beginning after February 9, 2018 (the 2019 tax year for calendar year taxpayers). An additional provision of note is the requirement that for the excise tax on investment income of private colleges and universities to apply, the 500 students must be "tuition-paying." This requirement was included in the original version of the Tax Cuts and Jobs Act, but was removed at the last minute to comply with budget reconciliation rules.

Comment

The Joint Committee on Taxation has estimated that extending the expired tax breaks will cost the federal government over $15 billion. The disaster relief will add $456 million to the deficit in addition to relief that has already been provided.

The Trump administration on February 12 released its much-anticipated fiscal year (FY) 2019 budget request, "Efficient, Effective, Accountable An American Budget." The administration’s proposal calls for IRS funding that focuses additional resources on enforcement and cybersecurity. Coming off passage of the Tax Cuts and Jobs Act, this year’s budget recommendations contain only a handful of additional tax proposals when compared to some prior-year budget requests.

The Trump administration on February 12 released its much-anticipated fiscal year (FY) 2019 budget request, "Efficient, Effective, Accountable An American Budget." The administration’s proposal calls for IRS funding that focuses additional resources on enforcement and cybersecurity. Coming off passage of the Tax Cuts and Jobs Act, this year’s budget recommendations contain only a handful of additional tax proposals when compared to some prior-year budget requests.

Take away. Presidential budget requests are not binding; rather, the requests offer a legislative proposal for congressional lawmakers to consider. A Treasury Department "Green Book" that traditional outlines an administration’s revenue proposals for the coming year is not expected this year in light of the Tax Cuts and Jobs Act’s recent passage. Some practitioners have expressed concern that not enough resources in the proposed budget would be allocated toward providing guidance to fully implement the new law.

IRS

The administration’s budget proposal breaks its IRS funding request into four parts. The administration proposes allocating $11.1 billion in base funding, $2.3 billion for key tax filing and compliance initiatives, and $110 million for IT modernization efforts. Additionally, funding is requested to expand and strengthen tax enforcement.

Comment

"These additional investments over the next 10 years are estimated to generate approximately $44 billion in additional revenue at a cost of $15 billion, yielding a net savings of $29 billion over 10 years," the proposal states.

Tax provisions

In addition to IRS funding, the administration’s 2019 budget requests certain tax changes. These changes, among others, would include provisions to provide more oversight of paid tax preparers, require valid Social Security numbers when claiming the earned income and child tax credits, allow the IRS more flexibility in correcting errors on tax returns that seek refunds, allow Medicare recipients with high-deductible plans to make tax-deductible contributions to health savings accounts, and, as part of the administration’s infrastructure plan, expand by $6 billion the use of tax-exempt private activity bonds.

New proposed regulations under the centralized partnership audit regime address how and when partnerships and their partners adjust tax attributes to take into account partnerships’ payment adjustments. They also provide, among other additions and clarifications to earlier proposed regs, rules to adjust basis and capital accounts if the partnership adjustment is a change to an item of gain, loss, amortization or depreciation.

New proposed regulations under the centralized partnership audit regime address how and when partnerships and their partners adjust tax attributes to take into account partnerships’ payment adjustments. They also provide, among other additions and clarifications to earlier proposed regs, rules to adjust basis and capital accounts if the partnership adjustment is a change to an item of gain, loss, amortization or depreciation.

Take away. "These proposed regulations layer additional complexity onto two sets of already complicated regulations: partnership allocations are under Code Sec. 704(b)and previously issued regulations interpreting the Centralized Partnership Audit Regime," Michael Grace, Esq., consulting counsel, Wiley Rein LLP, and former IRS pass-throughs attorney, told Wolters Kluwer. For example, under these proposed regulations, Grace observes that tax professionals must distinguish two categories of allocations under Code Sec. 704(b) that may result from a Centralized Partnership Audit:

• Items the allocations of which can have substantial economic effect, but only if the items are allocated as these regulations prescribe; and

• Allocations (including allocations of newly defined "notional items") that cannot have substantial economic effect but nevertheless will be deemed to accord with the partners’ interests in the partnership if allocated as these regulations require.

Background

The new centralized partnership audit regime, put into place under the Bipartisan Budget Act of 2015 (BBA), generally must be applied to audits of partnership returns filed for the 2018 tax years and thereafter. Their implementation generally looks to assessment at the partnership level, leaving the partnership to collect from existing partners, but with certain exceptions. In proposed regs that were issued in June 2017 (NPRM REG-136118-15), the IRS acknowledged that more guidance was necessary. In November, the IRS issued proposed regs on how certain international rules operate within the framework of the new centralized partnership audit regime (NPRM REG-119337-17). In December, the IRS issued proposed regs on the operation of the "push-out" rules for partner/partnership liability in tiered structures (NPRM REG-120232-17).

Imputed underpayments

When a positive partnership adjustment is taken into account in determining an imputed underpayment, Code Sec. 6225 does not provide for any item of taxable income to be allocated to partners. Instead, calculations are made at the partnership level, with the partnership paying the liability in the form of an imputed underpayment arising in the year of the audit adjustment. If, however, there are no adjustments to outside basis that reflect partnership adjustments that caused the imputed underpayment, a partner could effectively be taxed twice on the same income—once indirectly on the payment of the imputed underpayment, and again on a disposition of the partnership interest or a distribution of cash by the partnership. To prevent effective double taxation or other distortions in these cases, the new proposed regs provide for adjustment to a partner’s basis in its interest, and certain other tax attributes that depend on basis.

No imputed underpayment

The new proposed regs provide that an allocation of an item arising from a partnership adjustment that does not result in an imputed underpayment will not be deemed to have substantial economic effect ( Prop. Reg. §1.704-1(b)(4)(xiii)). It will, nevertheless, be deemed to be in accordance with the partners’ interests in the partnership if it is allocated in the manner in which the item would have been allocated in the reviewed year under the Code Sec. 704 regulations. taking into account the Code Sec. 704 successor rules.

"Push-out" elections

Code Sec. 6226(b) describes how partnership adjustments are taken in account by the reviewed year partners if a partnership makes a "push-out" election under Code Sec. 6226(a). Under Code Sec. 6226(b)(1), each partner’s tax is increased by the aggregate of the adjustment amounts determined under Code Sec. 6226(b)(2).

The new proposed regs provide that the reviewed year partners or affected partners must take into account items of income, gain, loss, deduction or credit with respect to their share of the partnership adjustments as reflected on statements relating to pushed-out items in the reporting year ( Prop. Reg. §301.6226-4(b)). Partnerships adjust tax attributes affected by reason of a pushed-out item in the reviewed year.

Code Sec. 704(b)

An allocation of a pushed-out item does not have substantial economic effect under Code Sec. 704, since the allocation relates to two different tax years (that is, while generally determined with respect to the reviewed year, notional items are taken into account in the adjustment year). Nevertheless, the proposed regs provide that the allocation of such an item will be deemed to be in accordance with the partners’ interests in the partnership if it is allocated in the adjustment year in the manner in which the item would have been allocated under the rules of Code Sec. 704(b) in the reviewed year, followed by any subsequent tax years, concluding with the adjustment year ( Prop. Reg. §1.704-1(b)(4)(xiv)).

Burdens of partnership underpayments

Under the new regulations, persons who were not partners in a reviewed year may be allocated some of a partnership’s payment to the IRS. If the "reviewed year partner" to whom the payment generally would be allocated is no longer around, then the payment instead must be allocated to that partner’s "successor."

The IRS has posted best practices for return preparers addressing the Affordable Care Act’s individual shared responsibility requirement, also known as the individual mandate. The Service reminded preparers that the Tax Cuts and Jobs Act did not eliminate the individual shared responsibility requirement for 2017.

The IRS has posted best practices for return preparers addressing the Affordable Care Act’s individual shared responsibility requirement, also known as the individual mandate. The Service reminded preparers that the Tax Cuts and Jobs Act did not eliminate the individual shared responsibility requirement for 2017.

Take away. The IRS has cautioned that it will not consider a 2017 return complete and accurate if the taxpayer does not report coverage, claim an exemption or report a shared responsibility payment. In past years, the IRS processed these so-called "silent returns."

Individual mandate

Individuals without minimum essential health coverage must make a shared responsibility payment, unless exempt. Individuals with employer-provided health insurance, Medicaid and Medicare, and certain other health insurance coverage, generally are treated as having minimum essential coverage.

Some exemptions may be obtained from the ACA Marketplace. Other exemptions may be claimed on a taxpayer’s return. These exemptions include individuals who are members of federally-recognized Native American Nations; individuals who are incarcerated, individuals with a short gap in coverage; certain hardships; and more.

Individuals make a shared responsibility payment when they file their return. The payment is a flat dollar amount or a percentage of income, whichever is greater.

Best practices

A client can show he or she had minimum essential coverage by a number of methods, the IRS explained. The ACA requires certain large employers to inform employees about their health coverage. Clients with coverage through the ACA Marketplace also receive notification. Individuals with government-provided coverage, such as Medicaid and Medicare, should have supporting documents.

A client may not have proof of coverage, the IRS noted. In this case, the preparer "should discuss the nature of the coverage including the months they were covered to get a reasonable assurance so the preparer can accurately complete the tax return,"the IRS explained.

Going forward

The Tax Cuts and Jobs Act effectively repealed the individual shared responsibility requirement by making any payment due $0. However, this change takes effect for months beginning after December 31, 2018. The individual shared responsibility requirement remains unchanged for 2017 and 2018.