Internal Revenue Service Archives - The National Law Forum

2025 Inflation-Adjusted Plan Limits

On Nov. 1, 2024, the IRS published its annual cost of living adjustments for various retirement plan limits. These increases are more modest than recent years, a reflection that inflation is slowing. The updated key retirement plan limits include the following items:

2025 Limit	2024 Limit
Annual Compensation Limit	$350,000	$345,000
Elective Deferral Limit	$23,500	$23,000
Standard Age 50 Catch-Up Contribution Limit	$7,500	$7,500
Age 60-63 Special Catch-Up Contribution Limit*	$11,250	N/A
DC Maximum Contribution Limit	$70,000	$69,000
DB Maximum Benefit Limit	$280,000	$275,000
HCE Threshold	$160,000	$155,000

*Note, this is a new provision under the SECURE 2.0 Act.

The IRS previously released the updated 2025 limits applicable to certain health and welfare plans, including the following key limits:

2025 Limit	2024 Limit
Health FSA – Maximum contributions	$3,300	$3,200
Health FSA – Maximum carryover of unused amounts (optional plan provision)	$660	$640
HSA – maximum contributions	$4,300 (self-only) $8,550 (family)	$4,150 (self-only) $8,300 (family)
HDHP – Minimum Deductible	$1,650 (self-only) $3,300 (family)	$1,600 (self-only) $3,200 (family)
HDHP – Maximum Out of Pocket	$8,300 (self-only) $16,600 (family)	$8,050 (self-only) $16,100 (family)

IRS Issues FAQs Regarding Long-Term Part-Time Employees in 403(b) Plans

The IRS recently issued Notice 2024-73, which provides much-needed guidance on long-term, part-time (“LTPT”) employees in ERISA-governed 403(b) retirement plans. Following passage of the SECURE 2.0 Act, an employee is generally considered a LTPT employee if he or she works at least 500 hours per year for two consecutive years.

Among other items, the Notice sets forth the IRS position on the following key issues on which the benefits community has been seeking clarification:

A part-time employee who qualifies as a LTPT employee must have the right to make elective deferrals to an ERISA 403(b) plan (unless some other statutory exemption applies), notwithstanding the Tax Code’s permitted exclusion for employees who normally work less than 20 hours per week.
An ERISA 403(b) plan may continue to exclude from the plan part-time employees who do not qualify as LTPT employees, notwithstanding the “consistency requirement,” which generally prevents a plan from excluding some part-time employees and not others.
An ERISA 403(b) plan is not required to provide the right to make elective deferrals to certain student employees, even if they qualify as LTPT employees. This is because the student employee exclusion is based on an employee classification (a student performing the service), rather than an amount of service (not an hours-based exclusion).

The guidance in the Notice is effective for plan years beginning after December 31, 2024. Importantly, the Notice also provides that a previously promulgated proposed regulation relating to the handling of LTPT employees in 401(k) plans, once finalized, will apply no earlier than plan years beginning on or after January 1, 2026 (i.e., a two-year extension).

It Ain’t Over ‘til It’s Over: IRS Reminds Taxpayers That Section 280E Applies to Marijuana Companies Until Rescheduling Becomes Law

This is a tax blog. Stay with me – it’s short.

While marijuana advocates celebrate the potential rescheduling of marijuana from Schedule I to Schedule III, the taxman has made clear that marijuana remains a Schedule I substance subject to Section 280E of the Internal Revenue Code. For those who aren’t cannabis tax specialists, 280E provides that:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Marijuana is a Schedule I controlled substance and is subject to the limitations of the Internal Revenue Code. As we previously reported, the Justice Department recently published a notice of proposed rulemaking with the Federal Register to initiate a formal rulemaking process to consider rescheduling marijuana to Schedule III under the Controlled Substances Act. That change would remove marijuana from the purview of 280E.

Predictably, a number of cannabis operators couldn’t help themselves and began filing amended returns seeking to avail themselves of what they apparently felt was a change in the law. The response from the IRS is clear:

Taxpayers seeking a refund of taxes paid related to Internal Revenue Code Section 280E by filing amended returns are not entitled to a refund or payment. Until a final rule is published, marijuana remains a Schedule I controlled substance and is subject to the limitations of Internal Revenue Code Section 280E.

The reasoning is simple – marijuana is a Schedule I substance until it is not. While there is currently in place a process that could lead to the rescheduling of marijuana, it has not actually been rescheduled.

Cannabis operators can dream of a time when they will not be subject to the ravages of 280E, but for now that remains just out of grasp, albeit tantalizingly close.

As usual, stay tuned to Budding Trends. We’ll be monitoring all the impacts of rescheduling, including tax implications like this one.

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Supreme Court Rules Against Taxpayers in IRC Section 965 Case

On June 20, 2024, the Supreme Court of the United States issued a 7-2 opinion in Moore v. United States, 602 U.S. __ (2024), ruling in favor of the Internal Revenue Service (IRS).

Moore concerned whether US Congress and the IRS could tax US shareholders of controlled foreign corporations (CFCs) on those corporations’ earnings even though the earnings were not distributed to the shareholders. The case specifically focused on the so-called “mandatory repatriation tax” under Internal Revenue Code (IRC) Section 965, a one-time tax on certain undistributed income of a CFC that is payable not by the CFC but by its US shareholders. Some viewed the case as hinging upon whether Congress has the power to tax economic gains that have not been “realized.” (i.e., In the case of a house whose value has appreciated from $500,000 to $600,000, the increased value is “realized” only when the house is sold and the additional $100,000 reaches the taxpayer’s coffers.)

However, Justice Brett Kavanaugh, joined by Chief Justice John Roberts and Justices Sonia Sotomayor, Elena Kagan and Ketanji Brown Jackson, rejected that position on the ground that the mandatory repatriation tax “does tax realized income,” albeit income realized by a CFC. On this basis, they reasoned that the question at issue was whether Congress has the power to attribute realized income of a CFC to (and tax) US shareholders on their respective shares of the undistributed income. This group of justices ultimately decided Congress does have the power.

The majority went out of its way to avoid expressing any opinion as to whether Congress can tax unrealized appreciation, with Justice Amy Coney Barrett’s concurrence and Justice Clarence Thomas’s dissent asserting that it cannot. Perhaps the Court was signaling a distaste for the Billionaire Minimum Income Tax proposed by US President Joe Biden, which would impose a minimum 20% tax on the total income of the wealthiest American households, including both realized and unrealized amounts, among other Democratic proposals.

Practice Point: We previously noted that certain taxpayers should consider filing protective refund claims contingent on the possibility that Moore would be decided in favor of the taxpayers. In light of the case’s outcome, however, those protective claims are now moot.

Protect Yourself: Action Steps Following the Largest-Ever IRS Data Breach

On January 29, 2024, Charles E. Littlejohn was sentenced to five years in prison for committing one of the largest heists in the history of the federal government. Littlejohn did not steal gold or cash, but rather, confidential data held by the Internal Revenue Service (IRS) concerning the United States’ wealthiest individuals and families.

Last week, more than four years after Littlejohn committed his crime, the IRS began notifying affected taxpayers that their personal data had been compromised. If you received a notice from the IRS, it means you are a victim of the data breach and should take proactive steps to protect yourself from fraud.

IN DEPTH

Littlejohn’s crime is the largest known data theft in the history of the IRS. He pulled it off while working for the IRS in 2020, using his access to IRS computer systems to illegally copy tax returns (and documents attached to those tax returns) filed by thousands of the wealthiest individuals in the United States and entities in which they have an interest. Upon obtaining these returns, Littlejohn sent them to ProPublica, an online nonprofit newsroom, which published more than 50 stories using the data.

Under federal law, the IRS was required to notify each taxpayer affected by the data breach “as soon as practicable.” However, the IRS did not send notifications to the affected taxpayers until April 12, 2024 – more than four years after the data breach occurred, and months after Littlejohn’s sentencing hearing.

TAKE ACTION

If you received a letter from the IRS (Letter 6613-A) enclosing a copy of the criminal charges against Littlejohn, it means you were a victim of his illegal actions. To protect yourself from this unprecedented breach of the public trust, we recommend the following actions:

Consider Applying for an Identity Protection PIN. A common crime following data theft involves using a taxpayer’s social security number to file fraudulent tax returns requesting large refunds. An Identity Protection PIN (IP PIN) can help protect you from this scheme. After you obtain an IP PIN, criminals cannot file an income tax return under your name without knowing your identification number, which changes annually. Learn more and apply for an IP PIN here.
Request and Review Your Tax Transcript. The IRS maintains a transcript of all your tax-related matters, including filings, payments, refunds, extensions and official notices. Regularly reviewing your tax transcript (e.g., every six to 12 months) can reveal fraudulent activity while there is still time to take remedial action. Request a copy of your tax transcript here. If you have questions about your transcript or need help obtaining it, we are available to assist you.
Obtain Identity Protection Monitoring Services. Applying for an IP PIN and regularly reviewing your tax transcript will help protect you from tax fraud, but it will not protect you from other criminal activities, such as fraudulent loan applications. To protect yourself from these other risks, you should obtain identity protection monitoring services from a reputable provider.
Evaluate Legal Action. Data breach victims should consider taking legal action against Littlejohn, the IRS and anyone else complicit in his wrongdoing. Justifiably, most victims will not want to suffer the cost, aggravation and publicity of litigation, but for those concerned with the public tax system’s integrity, litigation is an option.

In fact, litigation against the IRS is already underway. On December 13, 2022, Kenneth Griffin, the founder and CEO of Citadel, filed a lawsuit against the IRS in the US District Court for the Southern District of Florida after discovering his personal tax information was unlawfully disclosed to ProPublica. In his complaint, Griffin alleges that the IRS willfully failed to establish adequate safeguards over confidential tax return information – notwithstanding repeated warnings from the Treasury Inspector General for Tax Administration and the US Government Accountability Office that the IRS’s existing systems were wholly inadequate. Griffin is seeking an order directing the IRS “to formulate, adopt, and implement a data security plan” to protect taxpayer information.

The future of Griffin’s lawsuit is uncertain. Recently, the judge in his case dismissed one of his two claims and cast doubt on the theories underpinning his remaining claim. It could be years before a final decision is entered.

Although Griffin is leading the charge, joining the fight would bolster his efforts and promote the goal of ensuring the public tax system’s integrity. A final order in Griffin’s case will be appealable to the US Court of Appeals for the Eleventh Circuit. A decision there will be binding on both the IRS and taxpayers who live in Alabama, Florida and Georgia. However, the IRS could also be bound by orders entered by other federal courts arising from lawsuits filed by taxpayers who live elsewhere. Because other courts may disagree with the Eleventh Circuit, taxpayers living in other states could file their own lawsuits against the IRS in case Griffin does not prevail.

Victims of the IRS data breach who are interested in taking legal action should act quickly. Under the Internal Revenue Code, a lawsuit must be filed within two years after the date the taxpayer discovered the data breach.

How Big is the Permanent Tax Benefit in the Pending Tax Bill for Research Credit?

Congress perhaps made an unintended drafting error in the Tax Cuts and Jobs Act [1] (TCJA) when it required a taxpayer to decrease its deduction for research and experimental expenditures. The apparent drafting error is in IRC §280C(c)(1), which provides that if a taxpayer’s research credit for a taxable year exceeds the amount allowable as a deduction for research expenditures for the taxable year, the amount of research expenses chargeable to capital account must be reduced by the excess and not by the full amount of the credit.

H.B. 7024 (1-17-24) [2] proposes to correct the drafting error for tax year 2023 and expressly states that the amendment made for taxable year 2023 should not be construed to create an inference with respect to the proper application of the drafting error for taxable year 2022. [3] The “no inference” congressional language could be interpreted as inviting the IRS to attempt an administrative fix of the drafting error.

Background of Research Expenditure Deduction and Credit for Increasing Research Activities: Beginning with the Internal Revenue Code of 1954, a taxpayer engaging in research activities in the experimental or laboratory sense in connection with its trade or business could elect to deduct the cost of its research currently rather than capitalizing the cost to the project for which the research was conducted. The Economic Recovery Tax Act of 1981 added a credit for the cost of research incurred in carrying on a trade or business. The manner in which the deduction and credit operated permitted a taxpayer both to deduct and credit the same research dollar.

Pre-TCJA (2017) law: The Omnibus Budget Reconciliation Act of 1989 ended the possibility deducting and crediting the same research dollar. If a taxpayer currently deducted its research expenditures, the taxpayer had to decrease its deduction by the amount of the research credit that it claimed for the taxable year.[4] The policy reason for the decrease was that a taxpayer should not be entitled to a deduction and a credit for the same dollar expended for research. Put another way, if the government “pays” for research by allowing a credit, the taxpayer did not really pay for the research and should not be entitled to deduct the amount for which the government paid.

TCJA Amendment: The TCJA now requires a taxpayer to capitalize research expenditures paid or incurred in the taxable year and claim an amortization deduction for the expenditures ratably over a five-year period.[5] The TCJA also amended IRC §280C(c)(1), the provision that prevents a taxpayer from receiving a credit and a deduction for the same dollar of research expenditure. The amendment provides that if the research credit amount for the taxable year exceeds the amount allowable as a deduction for the taxable year for qualified research expenses, the research expenses chargeable to capital account for the taxable year must be reduced by the excess.[6] This might have been a drafting error. The research credit for the taxable year might not exceed an amortization deduction for the year.[7] If for a taxable year the credit does not exceed the amortization deduction, a taxpayer could reasonably conclude that no reduction in the amount of capitalized research expenditures is required. The taxpayer would be interpreting the deduction for qualified research expenses as meaning the amount of the amortization of the capitalized expenses.

The IRS might have an opposing interpretation. The phrase, “the amount allowable as a deduction for such taxable year for qualified research expenses” in IRC §280C(c)(1) could be interpreted as always equaling zero because the TCJA amendment requiring amortization of research expenditures for the taxable year nullifies the “deduction … for qualified research expenses.” In other words, there were no “deductible” qualified research expenses for the year after enactment of the TCJA for purposes of IRC §280C(c)(1). [8] The result would be that the capitalized research expenses are decreased by the amount of the credit.

H.B. 7024: On January 31, 2024, the House passed 353 to 70 H.B. 7024, “Tax Relief for American Families and Workers Act of 2024.” Action on the bill is pending in the Senate. The bill restores the current deduction for research expenditures (but only for research performed in the United States), beginning with taxable year 2022,[9] and defers the requirement to amortize research expenditures until taxable year 2026. For taxable years beginning in 2023, the bill requires a taxpayer to decrease the research expenditure deduction for domestic research by the amount of the research credit for the year, thus reinstating, for domestic research, IRC §280C(c)(1) as it had read prior to its amendment by the TCJA. [10]

But for taxable year 2022, the bill does not expressly require a taxpayer to reduce its deduction for research expenditures by the amount of the research credit even though the bill permits the taxpayer to deduct it research expenditures currently for taxable year 2022. Thus, for taxable year 2022, a taxpayer may deduct its research expenditures but must decrease the deduction only by the amount, if any, that its 2022 research credit exceeds its 2022 deduction for qualified research expenditures, which amount may be zero. Moreover, the bill provides that the amendment requiring a decreased deduction for research expenditures for taxable years beginning in 2023 should not be construed to create “any inference” with respect to the proper application of IRC §280C(c) to taxable year 2022.

IRS Notice: In Notice 2023-63 – obviously published before H.R. 7024 – the IRS asks for comments about to interpret the current version of IRC §280C(c)(1). If H.R. 7024 is enacted, the IRS request for comments would appear irrelevant.

Taxpayer Actions: If H.R. 7024 is enacted, taxpayers must consider whether to change their accounting method for research expenditures from amortizing them to currently deducting them. A change would affect many tax calculations, and obviously the only means by which to be certain of the effect is to run the change using various scenarios through the taxpayer’s tax software.

One of the effects to consider if the bill passes is the item discussed in the alert in which the taxpayer reads IRC §280C(c)(1) advantageously for taxable year 2022 and reduces its research expenditure deduction by the amount that the research credit exceeds the deduction for research expenditures for the year, which reduction amount may well be zero. The taxpayer would have a substantial permanent tax benefit by not decreasing its credit and not decreasing it deduction.

If H.B. 7024 is not enacted, a taxpayer might moderate the risk that the IRS will prevail on the interpretation of IRC §280C(c)(1) by electing to decease its credit under IRC §280C(c)(2).[11] But the taxpayer could be more aggressive by taking the position that it is applying IRC §280C(c)(1) and rarely, if ever, does it have to reduce its deduction for research expenditures. That means that the taxpayer that had historically decreased its credit in order to take the full deduction might not have to do so. That might be a very substantial permanent tax benefit.

[1] P.L. 115-97 115^th Cong. 1st Sess. (12-22-17).

[2] 118^th Cong., 2d Sess.

[3] H.B. 7024, Sec. 201(e)(4).

[4] Instead of decreasing the deduction, the taxpayer could elect to decrease its research credit by multiplying the credit amount by the corporate tax rate. IRC §280C(c)(2). Regardless of whether the taxpayer reduced its deduction or its credit, the federal income tax cost was the same. Many taxpayers elect to reduce the credit so that the full amount of the deduction flows into taxable income of states that conform state taxable income to federal taxable income.

[5] IRC §174(a)(2)(B). The deduction is spread over six taxable years because the taxpayer may deduct for the first amortization year only half of a full year’s amortization. If the research is performed outside the United States, the amortization period is fifteen years.

[6] IRC §280C(c)(1).

[7] For example, assume qualified research expenses for the taxable year 2022 of $1,000 and minimum base amount of $500. The research credit is $100 (20% times $500). The credit does not exceed the amortized deduction – $100 for the first taxable year.

[8] Of course, there were qualified research expenses identified for the research credit.

[9] Proposed IRC §174A(a). A taxpayer that had capitalized and amortized its research expenditures as required by the TCJA may file an amended return for tax year 2022 and deduct research expenditures paid or incurred for that year. Alternatively, the taxpayer may elect to adjust its taxable income under IRC § 481 by taking a favorable adjustment into account in taxable year 2023. Alternatively, it may elect to make the adjustment over taxable years 2023 and 2024. H.B. 7024, sec. 201(f)(2).

[10] The taxpayer could still elect to decrease its credit in lieu of reducing its deduction.

[11] See supra note 4.

Wealth Management Update January 2024

JANUARY 2024 INTEREST RATES FOR GRATS, SALES TO DEFECTIVE GRANTOR TRUSTS, INTRA-FAMILY LOANS AND SPLIT INTEREST CHARITABLE TRUSTS

The January applicable federal rate (“AFR”) for use with a sale to a defective grantor trust, self-canceling installment note (“SCIN”) or intra-family loan with a note having a duration of 3-9 years (the mid-term rate, compounded annually) is 4.37%, down from 4.82% in December 2023.

The January 2024 Section 7520 rate for use with estate planning techniques such as CRTs, CLTs, QPRTs and GRATs is 5.20%, down from the 5.80% Section 7520 rate in December 2023.

The AFRs (based on annual compounding) used in connection with intra-family loans are 5.00% for loans with a term of 3 years or less, 4.37% for loans with a term between 3 and 9 years, and 4.54% for loans with a term of longer than 9 years.

REG-142338-07 – PROPOSED REGULATIONS RELATED TO DONOR ADVISED FUNDS

On November 13, 2023, the Department of the Treasury and IRS released Proposed Regulation REG-142338-07 under Section 4966; providing guidance related to numerous open-issues with respect to certain tax rules relating to donor advised funds “(DAFs”).

Pursuant to §4966(d)(2)(A), a DAF is defined generally as a fund or account (1) that is separately identified by reference to contributions of a donor or donors, (2) owned and controlled by a sponsoring organization, and (3) with respect to which a donor (or person appointed or designated by such donor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investment of amounts held in the fund or account by reason of the donor’s status as a donor.

Under the proposed regulations, the definition of a DAF is consistent with the definition under the statute (the same three elements), however, the proposed regulations provide key definitions with respect to specific terms under the Statute.

Element #1: a fund that is separately identified by reference to contributions of a donor or donors.

Separately Identified: The proposed regulations provide that a fund or account is separately identified if the sponsoring organization maintains a formal record of contributions to the fund relating to a donor or donors (regardless of whether the sponsoring organization commingles the assets attributed to the fund with other assets of the sponsoring organization).

If the sponsoring organization does not maintain a formal record, then whether a fund or account is separately identified would be based on all the facts and circumstances, including but not limited to whether: (1) the fund or account balance reflects items such as contributions, expenses and performance; (2) the fund or account is named after the donors; (3) the sponsoring organization refers to the account as a DAF; (4) the sponsoring organization has an agreement or understanding with the donors that such account is a DAF; and (5) the donors regularly receive a statement from the sponsoring organization.

Donor: The proposed regulations broadly define a Donor as any person described in 7701(a)(1) that contributes to a fund or account of a sponsoring organization. However, the proposed regulations specifically exclude public charities defined in 509(a) and any governmental unit described in 170(c)(1). Note: Private foundations and disqualified supporting organizations are not excluded from the definition of a donor since they could use a DAF to circumvent the payout and other applicable requirements.

Element #2: a fund that is owned or controlled by a sponsoring organization. The definition of a sponsoring organization is consistent with §4966(d)(1), specifically, an organization described in §170(c), other than a private foundation, that maintains one or more DAFs.

Element #3: a fund under which at least one donor or donor-advisor has advisory privileges.

Advisory Privileges: In general, the existence of advisory privileges is based on all facts and circumstances, but it is presumed that the donor always has such privileges (even if no advice is given).

The proposed regulations provide that advisory privileges exist when: (i) the sponsoring organization allows a donor or donor-advisor to provide nonbinding recommendations regarding distributions or investments of a fund; (ii) a written agreement states that a donor or donor-advisor has advisory privileges; (iii) a written document or marketing material provided to the donor or donor-advisor indicates that such donor or donor-advisor may provide advice to the sponsoring organization; or (iv) the sponsoring organization generally solicits advice from a donor or donor-advisor regarding distributions or investment of a DAF’s assets.

Donor-Advisor: Defined by the proposed regulations as a person appointed or designated by a donor to have advisory privileges regarding the distribution or investment of assets held in a DAF. If a donor-advisor delegates any of the donor-advisor’s advisor privileges to another person, such person would also be a donor-advisor.

Potential Issue related to Investment Advisors: Is a donor’s personal investment advisor deemed a “donor-advisor?” Pursuant to the proposed regulations:

An investment advisor will not be deemed a donor-advisor if he or she:
- Serves the supporting organization as a whole; or
- Is recommended by the donor to serve on a committee (of more than 3) of the sponsoring organization that advises as to distributions
However, an investment advisor will be deemed a donor-advisor if he or she manages the investments of, or provides investment advice with respect to, both assets maintained in a DAF and the personal assets of a donor to that DAF while serving in such dual capacity. This provision, if finalized may have important consequences for fee structures used by supporting organizations since payments from a DAF to an investment advisor who is considered a donor-advisor will be deemed a taxable distribution under §4966. The IRS is requesting additional comments on this potential issue and is still under consideration.

Exceptions to the Definition of a DAF Under the Proposed Regulations:

A multiple donor fund or account will not be a DAF if no donor or donor-advisor has, or reasonably expects to have, advisory privileges.
An account or fund that is established to make distributions solely to a single public charity or governmental entity for public purposes is not considered a DAF.
A DAF does not include a fund that exclusively makes grants for certain scholarship funds related to travel, study or other similar purposes.
Disaster relief funds are not DAFs, provided they comply with other requirements.

Applicability Date: The proposed regulations will apply to taxable years ending on or after the date on which final regulations are published in the Federal Register.

EILEEN GONZALEZ ET AL V. LUIS O. CHIONG ET AL (SEP. 19, 2023)

Miami Circuit Court enters significant judgment for liability related to ownership of golf cart.

Eileen Gonzalez and Luis Chiong and their families were neighbors in a Miami suburb. The families were good friends and had many social interactions. Luis owned a golf cart which he constantly allowed to be driven and used by other people and Eileen’s minor children were often passengers on this specific golf cart.

Luis’ step-niece, Zabryna Acuna, was visiting for July 4^th weekend in 2016. Zabryna (age 16 at that time) visited often and during each visit, she had permission to drive the golf cart. On July 4, 2016, Zabryna took the golf cart for a drive with Luis’ son and Eileen’s minor children as passengers.

While driving on a public street, Zabryna ran a stop sign and collided with another car which caused all of the passenger to be ejected from the golf cart. Every passenger suffered injuries, however, Eileen’s son, Devin, suffered a particularly catastrophic brain injury. This led to an eventual lawsuit.

The Circuit Court ruled that Luis owed the plaintiffs a duty of reasonable care which he breached and was negligent in entrusting the golf cart to his niece who negligently operated it causing the crash and injuries at issue. The Court further held that pursuant to the Florida Supreme Court, a golf cart is a dangerous instrumentality, and the dangerous instrumentality doctrine imposes vicarious liability upon the owner of a motor vehicle who voluntarily entrusts it to an individual whose negligent operation if it causes damage to another.

Ultimately, the Court awarded a total judgment of $50,100,000 (approximately $46,100,000 to Devin and approximately $4,000,000 to his parents).

IR-2023-185 (OCT 5, 2023)

The IRS warns of Art Valuation Schemes (Oct 5, 2023).

The IRS essentially issued a warning to taxpayers that they will be increasing investigations and taxpayer audits for incorrect or aggressively creative deductions with respect to donations of art. Additionally, the IRS is paying attention to art promoters who are involved in such schemes.

The IRS is warning taxpayers to exercise caution when approached by art promoters who are commonly attempting to facilitate the following specific scheme wherein: (i) a taxpayer is encouraged to purchase art at a significantly discounted price; (ii) the taxpayer is then advised to hold the art for a period of at least one year; and (iii) the taxpayer subsequently donates the art to a charity (often times a charity arranged by the promoter) and claim a tax deduction at an inflated market value, often significantly more than the original purchase price.

This increased scrutiny has led to over 60 completed audits with many more in process and has led to more than $5,000,000 in additional tax.

The IRS reminds taxpayers that they are ultimately responsible for the accuracy of the information reported on their tax return regardless of whether they were enticed by an outside promoter. Therefore, the IRS has provided the following red flags with respect to the purchase of artwork: (i) taxpayers should be wary of buying multiple works by the same artist that have little to no market value outside of what a promoter is advertising; and (ii) when the appraisal coordinated by a promoter fails to adequately describe the artwork (such rarity, age, quality, condition, stature of the artist, etc.).

Within the Notice, the IRS details the tax reporting requirements for donations of art. Specifically, whenever a taxpayer intends to claim a charitable contribution deduction of over $20,000 for an art donation, they must provide the following: (i) the name and address of the charitable organization that received it; (ii) the date and location of the contribution; (iii) a detailed description of the donated art; (iv) a contemporaneous written acknowledgement of the contribution form the charitable organization; (v) completed Form 8283, Noncash Charitable Contribution, Section A and B including signatures of the qualified appraiser and done; and (vi) attach a copy of the qualified appraisal to the tax return. They may also be asked to provide a high-resolution photo or digital image.

NEW YORK PUBLIC HEALTH LAW AMENDED TO PERMIT REMOTE WITNESSES FOR HEALTH CARE PROXIES (NOV 17, 2023)

An amendment to Section 2981 of New York Public Health Law was signed into law by the governor on November 17, 2023.

Section 2981 was amended to add a new subdivision 2-a, as follows:

2-A. Alternate procedure for witnessing health care proxies. Witnessing a health care proxy under this section may be done using audio-video technology, for either or both witnesses, provided that the following conditions are met:

The principal, if not personally known to a remote witness, shall display valid photographic identification to the remote witness during the audio-video conference;
The audio-video conference shall allow for direction interaction between the principal and any remote witness;
Any remote witness shall receive a legible copy of the health care proxy, which shall be transmitted via facsimile or electronic means, within 24 hours of the proxy being signed by the principal during the conference; and
The remote witness shall sign the transmitted copy of the proxy and return it to the principal.

SMALL BUSINESS SUCCESSION PLANNING ACT INTRODUCED (OCT 12, 2023)

On October 12, 2023, the Small Business Succession Planning Act was introduced to provide businesses with resources to plan successions, including a one-time $250 credit to create a business succession plan and an additional one-time $250 tax credit when the plan is executed.

Under the proposed Bill, the SBA will provide a “toolkit” to assist small business concerns in establishing a business succession plan, including:

Training resource partners on the toolkit;
Educating small business concerns about the program;
Ensuring that each SBA district office has an employee with the specific responsibility of providing counseling to small business concerns on the use of such toolkit; and
Hold workshops or events on business succession planning.

Pursuant to the proposed Act, the following credits would be available:

$250 for the first taxable year during which the SBA certifies that the taxpayer has: (a) established a business succession plan; (b) is a small business concern at that time; and (c) does not provide for substantially all of the interests or assets to be acquire by one or more entities that are not a small business concern.
An additional $250 for the first taxable year which the SBA certifies that the taxpayer has successfully completed the items described above.

Look-back Rule: If substantially all of the equity interests in business are acquired by an entity that is not a small business concern within three-years of establishment of a business succession plan or completion of such responsibilities (as the case may be) the credits will be subject to recapture.

Small Business Concern (defined under Section 3 of the Small Business Act): A business entity that (a) is legal entity that is independently owned and operated; and (b) is not dominant in its field of operation and does not exceed the relevant small business size standard (subject to standards and number of employees provided by the North American Industry Classification System).

Henry J. Leibowitz, Caroline Q. Robbins, Jay D. Waxenberg, and Joshua B. Glaser contributed to this article.

Taxpayer Makes Offer, But IRS Refused

James E. Caan, the movie actor most famous for playing Sonny Corleone in The Godfather, got into IRS trouble regarding the attempted tax-free rollover of his IRA.

Caan had two IRA accounts at UBS, a multinational investment bank and financial services company. One account held cash, mutual funds and exchange-traded funds (ETF) and the other account held a partnership interest in a hedge fund called P&A Multi-Sector Fund, L.P.

Because the hedge fund was a non-publicly traded investment, UBS required Caan to provide UBS with the year-end fair market value to prepare IRS Form 5498. Caan never provided the fair market value as of December 31, 2014. UBS issued a number of notices and warnings to Caan and finally on November 25, 2015, UBS resigned as custodian of the P&A Interest. UBS issued Caan a 2015 Form 1099-R reporting a distribution of $1,910,903, which was the value of the P&A Interest, used as of December 31, 2013. Caan’s 2015 tax return reported the distribution as nontaxable.

In June 2015, Caan’s investment advisor Michael Margiotta resigned from UBS and began working for Merrill Lynch. In October 2015, Margiotta got all UBS IRA assets to transfer to a Merrill Lynch IRA, except for the P&A Interest. The P&A Interest was ineligible to transfer through the Automated Customer Account Transfer Service. In December 2016, Mr. Margiotta directed the P&A Fund to liquidate the P&A Interest and the cash was transferred to Caan’s Merrill Lynch IRA in three separate wires between January 23 and June 21, 2017.

In April 2018, the IRS issued a Notice of Deficiency for the 2015 tax year asserting that distribution of the P&A Interest was taxable. On July 27, 2018, Caan requested a private letter ruling asking the IRS to waive the requirement that a rollover of an IRA distribution be made within 60 days. In September 2018, the IRS declined to issue the ruling.

Caan died July 6, 2022. In the Estate of Caan v. Commissioner, 161 T.C. No. 6 (October 18, 2023), the Tax Court ruled that Caan was not eligible for a tax-free IRA rollover of the P&A Interest for three reasons. First, to be a nontaxable rollover the taxpayer may not change the character of any noncash distributed property, but here, the P&A Interest was changed to cash before being rolled-over. Second, the contribution of the cash occurred long after the 60-day deadline. Third, only one rollover contribution is allowed in any one-year period, but Caan had three contributions. The Court also determined the 2015 fair market value of the P&A Interest.

Finally, the Tax Court determined that it has jurisdiction to review the IRS denial of the 60-day waiver request and that the applicable standard of review is an abuse of discretion. The Court ruled there was no abuse of discretion because Caan changed the character of the rollover property and even if the IRS waived the 60-day requirement, the rollover would still not be tax-free.

The case highlights some of the potential dangers in holding non-traditional, non-publicly traded assets in an IRA.

What Taxpayers in the U.S. and Abroad Need to Know about FBAR Compliance

United States taxpayers have an obligation to report their foreign financial accounts (i.e., offshore or foreign bank accounts) to the federal government. While there are thresholds that apply, these thresholds are relatively low, so most offshore account holders will need to file reports on an annual basis. One of these reports is the Report of Foreign Bank and Financial Accounts, more commonly known as an FBAR (Foreign Bank Account Report).

For U.S. taxpayers, FBAR compliance is extremely important. This is true for taxpayers residing both domestically and overseas. The FBAR is required for US citizens because foreign banks don’t have the same reporting obligations as US-based institutions. Noncompliance in reporting foreign bank accounts can lead to civil or criminal penalties; and, in many cases, failure to file an FBAR will lead to an examination of the taxpayer’s other recent tax filings as well.

“The obligation to file an FBAR applies to most U.S. taxpayers with offshore bank accounts. While many taxpayers are unaware of the FBAR filing requirement, this unawareness is not an excuse for noncompliance. Taxpayers with delinquent FBARs can face substantial penalties regardless of why they have failed to file.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

Technically, FBARs are due on Tax Day along with taxpayers’ annual income tax returns. However, all taxpayers receive an automatic extension to October 15—with no need to file a request and no risk of incurring additional penalties.

10 Key Facts about FBAR Compliance for U.S. Taxpayers

As the extended October 15 FBAR deadline is fast approaching, here is an overview of what taxpayers in the U.S. and abroad need to know:

1. The FBAR Filing Requirement Applies to U.S. Taxpayers Who Hold Foreign Financial Accounts

The FBAR filing requirement applies to U.S. taxpayers who hold foreign financial accounts. It also applies to taxpayers who have “signature or other authority” over these foreign accounts. These obligations exist under the federal Bank Secrecy Act (BSA). Taxpayers covered under the BSA must file FBARs with the Financial Crimes Enforcement Network (FinCEN) annually.

While the FBAR filing requirement applies to most types of foreign financial accounts, there are exceptions. For example, FBAR compliance is not required with respect to accounts:

Owned by governmental entities
Owned by foreign financial institutions
Held at U.S. military banking facilities
Held in individual retirement accounts (IRAs)
Held in certain other retirement plans

FinCEN has publicly taken the position that accounts solely holding cryptocurrency also do not qualify as foreign financial accounts for purposes of FBAR compliance. However, FinCEN has also stated that it “intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding [FBARs] to include virtual currency as a type of reportable account.” As a result, U.S. taxpayers who hold cryptocurrency overseas should continue to review FinCEN’s regulatory announcements to determine if their offshore cryptocurrency accounts will trigger FBAR compliance obligations in the future.

2. The FBAR Reporting Threshold is $10,000

The requirement to file an FBAR applies only to U.S. taxpayers whose foreign financial accounts exceed $10,000 during the relevant tax year. This is an aggregate threshold, meaning that it applies to all foreign financial accounts jointly, and the obligation to file an FBAR is triggered if the aggregate value of a taxpayer’s foreign financial accounts exceeds the $10,000 threshold at any point and for any length of time.

3. U.S. Taxpayers Must File Their FBARs Online

A person residing in the United States who has a financial interest in or signatory power over a foreign financial account is required to file an FBAR if the total value of the foreign financial accounts at any time during the calendar year exceeds $10,000. While U.S. taxpayers have the option to e-file their annual income tax returns, taxpayers must file their FBARs online. Taxpayers can do so through FinCEN’s website.

4. The IRS Enforces FBAR Compliance

Even though U.S. taxpayers must file their FBARs with FinCEN, the Internal Revenue Service (IRS) is responsible for enforcing FBAR compliance. This means that taxpayers that fail to meet their FBAR filing obligations must be prepared to deal with the IRS when it uncovers their delinquent filings. It also means that delinquent filers must follow the IRS’s procedures for coming into voluntary compliance to avoid unnecessary penalties—as discussed in greater detail below.

5. FBAR Filers May Also Need to File IRS Form 8938

In addition to filing an annual FBAR, U.S. taxpayers who own foreign financial accounts may also need to file IRS Form 8938. The obligation to file this form applies to U.S. taxpayers who own foreign financial assets (not solely foreign financial accounts) that exceed the thresholds established under the Foreign Account Tax Compliance Act (FATCA).

6. There are Special Mechanisms for Filing Delinquent FBARs

When individuals learn that they are at risk of facing an IRS audit or investigation due to failure to file an FBAR, their first instinct is often to file any and all delinquent FBARs right away.

However, this is not the IRS’s preferred approach, and it can expose taxpayers to penalties and interest unnecessarily.

The IRS offers two primary mechanisms for U.S. taxpayers to correct FBAR filing deficiencies—one for civil violations and one for criminal violations. The primary mechanism for correcting civil violations is to make a “streamlined filing,” while taxpayers who are at risk for criminal prosecution must make a “voluntary disclosure” to IRS Criminal Investigation (IRS CI).

As the IRS explains, the option to make a streamlined filing is “available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.” The ability to make this certification of non- willfulness is critical. If a taxpayer falsely certifies to non-willfulness (or if the IRS determines that a taxpayer’s certification is fraudulent), the IRS can reject the taxpayer’s streamlined filing and pursue criminal enforcement action.

For those who have willfully failed to file FBARs, coming into compliance generally involves using IRS CI’s Voluntary Disclosure Practice (VDP). As stated by IRS CI, “If you have willfully failed to comply with tax or tax-related obligations, submitting a voluntary disclosure may be a means to resolve your non-compliance and limit exposure to criminal prosecution.” However, as IRS CI also states, “[a] voluntary disclosure will not automatically guarantee immunity from prosecution.”

With this in mind, when seeking to correct past FBAR filing failures, U.S. taxpayers need to make informed and strategic decisions. To do so, they should rely on the advice of experienced legal counsel. While streamlined filings and voluntary disclosures both provide protection from prosecution, they offer protection under different circumstances, and taxpayers must follow a stringent set of procedures to secure the available protections.

7. Failure to File an FBAR Can Lead to Civil or Criminal Prosecution

One of the key requirements for securing protection under the IRS’s streamlined filing compliance procedures or the VDP is that the taxpayer must not already be the subject of an IRS audit or investigation. When facing audits and investigations related to FBAR noncompliance, taxpayers must assert strategic defenses focused on avoiding civil or criminal prosecution.

Both the BSA and FATCA provide federal prosecutors with the ability to pursue civil or criminal charges. Typically, civil cases focus on unintentional violations, while prosecutors pursue criminal charges in cases involving intentional efforts to conceal foreign financial assets from the U.S. government. However, prosecutors may choose to pursue civil charges for “willful” violations as well; and, in some cases, asserting a strategic defense will involve focusing on keeping a taxpayer’s case civil in nature.

8. The Penalties for FBAR Non-Compliance Can Be Substantial

Why is it important to keep an FBAR non-compliance case civil? The simple answer is that in civil cases prison time isn’t on the table. Under the BSA, U.S. taxpayers charged with intentionally failing to file an FBAR can face a criminal fine of up to $250,000 and up to five years of federal imprisonment.

But, even in civil cases, a finding of FBAR noncompliance can still lead to substantial penalties. For non-willful violations, taxpayers can face fines of up to $10,000 per violation. For willful violations prosecuted civilly, taxpayers can face fines of up to 50% of the undisclosed account value or $100,000, whichever is greater (subject to a maximum penalty of 100% of the account value).

9. U.S. Taxpayers Who Have Questions or Concerns about FBAR Compliance Should Seek Help

Given the substantial risks of FBAR non-compliance, U.S. taxpayers who have questions or concerns about compliance should seek help promptly. They should consult with an experienced attorney, and they should work closely with their attorney to make informed decisions about their next steps.

10. FBAR Filers Must Keep Records On-Hand

Finally, in addition to filing their FBARS with FinCEN online, U.S. taxpayers who are subject to the BSA must also comply with the statute’s recordkeeping requirements. Minimally, taxpayers must retain the following records for each account they disclose on an FBAR:

Account number
Account type
Name on the account
Name and address of the foreign bank holding the account
Maximum value of the account during the relevant tax year

According to the IRS, “the law doesn’t specify the type of document to keep with this information,” and taxpayers typically “must keep these records for five years from the due date of the FBAR.”

Article By Dr. Nick Oberheiden of Oberheiden P.C.

For more tax law legal news, click here to visit the National Law Review.

IRS Announces 2023 Increases to Estate and Gift Tax Exclusions

The Internal Revenue Service recently announced the 2023 cost of living adjustments for the estate and gift tax exclusion amounts.

Gift Tax Exclusion Amount:

The annual gift tax exclusion is the amount (“Gift Tax Exclusion Amount”) an individual may gift to any number of persons without incurring a gift tax or reporting obligation. The Gift Tax Exclusion Amount will increase from $16,000 to $17,000 in 2023 (a combined $34,000 for married couples). The Gift Tax Exclusion Amount renews annually, so an individual who gifted $16,000 to someone in 2022 may gift $17,000 to that same person in 2023, without any reporting obligation. However, for any gift above the $17,000 in 2023, the individual making the gift must report it to the IRS.

Example A: A single person gives her two children $17,000 each in 2023. Each gift falls within the Gift Tax Exclusion Amount so the gifting individual will not have to pay any gift tax or notify the IRS. A married couple could give $34,000 to each child, with the same effect.

Example B: Compare a single person who wants to give her only child $20,000 in 2023. The person who gave the gift must notify the IRS of the $3,000 gift because it exceeds the $17,000 Gift Tax Exclusion Amount.

Estate Tax Exclusion Amount:

The estate tax exclusion is the amount (“Estate Tax Exclusion Amount”) an individual can transfer estate tax-free upon his or her death. The Estate Tax Exclusion Amount will increase from $12,060,000 to $12,920,000 in 2023 (a combined $25,840,000 for married couples).

Example A: A single person with two children passes away in 2023 owning $12,920,000 in assets. The deceased person’s two children will inherit the full $12,920,000 as no estate tax is owed.

Example B: A single person with two children passes away in 2023 owning $20,000,000 in assets. The decedent’s estate will owe tax on the assets owned that exceeded the $12,920,000 Estate Tax Exclusion Amount ($20,000,000 – $12,920,000 = $7,080,000). The current estate tax rate is approximately 40% which means the decedent’s estate will owe estate taxes in the amount of $2,832,000 ($7,080,000 x 40%).

For more Tax Law News, click here to visit the National Law Review.

Tag: Internal Revenue Service

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