In Exelon, the Seventh Circuit held that exchanges by Exelon Corporation (“Taxpayer”) of nuclear power plants for long-term leasehold interests in power plants located in other states were not exchanges qualifying for like-kind exchange treatment under Code Section 1031. According to the court, the Taxpayer did not acquire the benefits and burdens of ownership but rather received an interest more in the nature of a loan, which was not like-kind with the relinquished real property.
The IRS issued notices of deficiency for tax years 1999 and 2001. The tax deficiency for 1999 was in excess of $431 million. On top of that, the Service imposed a 20% accuracy related penalty under Code Section 6662(a) that exceeded $86 million. For 2001, the deficiency was a bit over $5.5 million. Again, for good measure, the Service tacked on a 20% accuracy related penalty of about $1.1 million.
The U.S. Tax Court affirmed both the deficiency assessment and the imposition of accuracy related penalties. Exelon Corp. v. Comm’r, 147 TC 230 (2016). On October 3, 2018, the U.S. Court of Appeals for the Seventh Circuit affirmed the Tax Court. Exelon Corp. v. Comm’r, 122 AFTR 2d ¶2018-5299 (2018).
The saga of Exelon Corporation is a long and complex read, but the morals to the story definitely warrant tax advisors dedicating the time to understand the case.
As we discussed in our February 27, 2018 blog post, the Tax Cuts and Jobs Act ("TCJA") eliminated the deduction for entertainment expenses. Despite commentary to the contrary, we have consistently reported that meals continue to be deductible (subject to the 50% limitation under Code Section 274(n)) post TCJA under Code Section 274(k) as long the meals are not lavish or extravagant, and the taxpayer (or an employee of the taxpayer) is present at the furnishing of the meals. Our position relative to meals is supported by guidance from the Service (IRS Notice 2018-76) issued on October 3, 2018. More importantly, the recently issued guidance focuses on an issue raised in our prior blog post, namely whether meals purchased at an entertainment event are deductible provided the requirements of Code Section 274(k) are satisfied. We suspected that the Service would issue guidance on this issue. It did.
The NYU 77th Institute on Federal Taxation (IFT) is taking place in New York City on October 21-26, 2018, and in San Diego on November 11-16, 2018. This year, I will be presenting my latest White Paper, Subchapter S After The Tax Cuts And Jobs Act – The Good, The Bad And The Ugly. My presentation will include a discussion about the direct changes made by the TCJA to Subchapter S as well as the impact on Subchapter S by other provisions of the TCJA, including creation of a single corporate tax rate under Section 11, creation of the Section 199A deduction, elimination of personal property exchanges under Section 1031, and elimination of the corporate alternative minimum tax. I will also discuss the ongoing benefits of Subchapter S and new traps that exist for the unwary.
The IFT is one of the country's leading tax conferences, geared specifically for CPAs and attorneys who regularly are involved in federal tax matters. The speakers on our panel, Taxation of Closely Held Businesses, include some of the most preeminent tax attorneys in the United States, including Jerry August, Terry Cuff, Wells Hall, Stephen Looney, Ronald Levitt, Stephen Kuntz, Mark Peltz, and Bobby Philpott. I am proud to be a part of IFT.
This will be my eighth year as an IFT presenter, and I am again speaking as part of the Closely Held Business panel on October 25 (NYC) and November 15 (San Diego). As in previous years, the IFT will cover a wide range of fascinating topics, including tax controversy, executive compensation and employee benefits, international taxation, corporate taxation, real estate taxation, partnership taxation, taxation of closely-held businesses, trusts and estates, and ethics. The IFT is especially important this year given the recent passage of the TCJA and the many new tax provisions that were added to the Code, including Section 199A.
I hope you will join us this year for what will be a terrific tax institute. Looking forward to seeing you in either New York or San Diego!
View the complete agenda and register at the NYU 77th IFT website.
The Service issued proposed regulations corresponding to IRC § 199A today. As discussed in a prior blog post, IRC § 199A potentially allows individuals, trusts and estates to deduct up to 20% of qualified business income (“QBI”) received from a pass-through trade or business, such as an S corporation, partnership (including an LLC taxed as a partnership) or sole proprietorship.
The deduction effectively reduces the new top 37% marginal income tax rate for business owners to approximately 29.6% (i.e., 80% of 37%) in order to put owners of pass-through entities on a more level playing field with owners of C corporations who now have the benefit of the greatly reduced 21% top corporate marginal tax rate under the Tax Cuts and Jobs Act (“TCJA”). The concept sounds simple, but the application is complex. The new Code provision contains complex definitions and limitations, requires esoteric calculations, and is accompanied by many traps and pitfalls.
New York Attorney General Barbara Underwood and New York Governor Andrew Cuomo announced today that the state of New York, joined by the states of Connecticut, New Jersey and Maryland, have instituted a lawsuit against the federal government in the U.S. District Court for the Southern District of New York, seeking to strike the $10,000 cap imposed on the state and local tax (“SALT”) itemized deduction by the Tax Cuts and Jobs Act (“TCJA”) as unconstitutional.
The lawsuit, which specifically names Steven Mnuchin, U.S. Treasury Secretary and David Kautter, Acting Commissioner of the Internal Revenue Service, as defendants, asserts that the SALT cap (previously discussed in an earlier blog post) was specifically enacted by the federal government to target New York and similarly situated states, that it interferes with a state’s right to make its own fiscal decisions, and that it disproportionately adversely impacts taxpayers in those states.
On June 21, 2018, the U.S. Supreme Court reversed half a century of legal precedent in a landmark 5-4 decision, South Dakota v. Wayfair, Inc. Under prior law, a state was forbidden from collecting sales tax against out-of-state sellers unless the sellers had physical presence within the state (such as a business location, employees, or property).
The physical presence standard arose from a decision in a 1967 U.S. Supreme Court case, National Bellas Hess v. Department of Revenue of Illinois. In that case, the Court held that a mail-order company, whose only connection with customers in Illinois was by common carrier or U.S. mail, did not have sufficient connection with the state to warrant allowing it to tax the company. In 1992, the Court affirmed that holding in Quill Corp. v. North Dakota. The physical presence standard established by the Court in Bellas Hess and Quill has been a bright-line rule that presided over the rise of Internet commerce. That rule has now changed!
As we have been discussing these past several weeks, the Tax Cuts and Jobs Act (“TCJA”) drastically changed the Federal income tax landscape. The TCJA also triggered a sea of change in the income tax laws of states like Oregon that partially base their own income tax regimes on the Federal tax regime. When the Federal tax laws change, some changes are automatically adopted by the states, while other changes may require local legislative action. In either case, state legislatures must decide which parts of the Federal law to adopt (in whole or part) and which parts to reject, all while keeping an eye on their fiscal purse.
The Tax Cuts and Jobs Act (“TCJA”) will significantly impact merger and acquisition (“M&A”) activity. Although billed as tax reform, the TCJA did not reform or simplify the Internal Revenue Code (“Code”).
Virtually none of the provisions of the TCJA directly impact M&A transactions. Rather, the TCJA added or modified several sections of the Code that indirectly impact transaction structuring, pricing, negotiations and due diligence. Making matters more complex, some of these provisions of the TCJA are temporary.
This blog post briefly highlights several key provisions of the TCJA and the impact on M&A.
Charitable organizations work hard to maintain exempt status. These organizations operate in a highly regulated landscape: In exchange for enjoying freedom from income taxes, they must comply with strict organizational and operational rules. Even before the Tax Cuts and Jobs Act (“TCJA”), adhering to these rules required constant oversight. The TCJA changes the rules, impacting both the operations and funding of these organizations.
On the operational side, we review below: Changes to the rules on unrelated business taxable income and employee fringe benefits, the new excise taxes imposed on executive compensation, and college and university endowments, and changes to substantiation requirements for certain donations.
On the funding side, we review below: How changes to the standard deduction (addressed in more detail in a prior blog post), cash contribution limits, deductions for payments to colleges and universities for the right to purchase athletic event tickets, and the estate tax may impact donors and charitable giving patterns.
The Tax Cuts and Jobs Act (“TCJA”) creates the need for tax planning with respect to several major life-changing activities individuals may encounter, including marriage, divorce, home ownership, casualty losses, medical expenses and parenting. More specifically, the TCJA makes major changes to the existing framework of personal exemptions and itemized deductions, the child tax credit, the tax treatment of alimony and spousal maintenance payments made as a result of divorce, and the alternative minimum tax (“AMT”).
The primary focus of this blog post is the provisions of the TCJA that significantly impact families and individuals. Many of these provisions have been exhaustively reviewed by other commentators in the past several weeks. In those instances, our discussion is brief. Rather, we decided to place the bulk of our discussion on the less obvious provisions of the TCJA that may have significant impact on families and individuals.
Larry J. Brant is a Shareholder in Garvey Schubert Barer, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; New York, New York; Washington, D.C.; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- "Tax Law Update for Family Law Practitioners," Oregon State Bar - Family Law Section 2019 Annual ConferenceSunriver, OR, 10.10.19-10.12.19
- "The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, but It Isn’t Free of Potholes and Obstacles," New York University 78th Institute on Federal TaxationNew York, NY, 10.20.19-10.25.19
- "The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, but It Isn’t Free of Potholes and Obstacles," Oregon Society of Certified Public Accountants (OSCPA) 2019 Northwest Federal Tax ConferencePortland, OR, 10.28.19
- "The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, but It Isn’t Free of Potholes and Obstacles," New York University 78th Institute on Federal TaxationSan Francisco, CA, 11.10.19–11.15.19
- "The Oregon Corporate Activity Tax," Oregon Society of Certified Public Accountants (OSCPA) 2020 OSCPA State & Local Tax ConferencePortland, OR, 1.6.20