Tax News & Views B-B-B Bitcoin Roundup

Cryptocurrency Soft Letters Yield Big Bang for the Buck - Nathan Richman, Tax Notes ($):

The IRS used the information it got from its John Doe summons to Coinbase Inc. to send taxpayers 10,000 letters reminding them to report their taxable gains from dealing in virtual currencies.

Those letters induced approximately 600 calls to an IRS hotline, 577 taxpayer amended returns, and an additional $15 million in assessed tax liabilities, according to Steve Dyson of the IRS Office of Fraud Enforcement (OFE).

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The IRS received information about approximately 14,000 users with transactions over $20,000 in response to the Coinbase summons.

Related: New Tax Guidance Issued on Cryptocurrency Transactions. 

With eye on 2021 law, crypto industry to ‘engage’ with Congress in 2022 - Caitlin Reilly, Roll Call. "Representatives from advocacy groups said cryptocurrency reporting requirements in the bipartisan infrastructure package this year were a wake-up call for many in the industry."

Whither BBB? Punchbowl News observes:

Still, we thought it might be helpful to lay out what needs to happen in order for the Senate to get the BBB through in the next 11 days -- which is Senate Majority Leader Chuck Schumer’s deadline.

First, let’s start with this: Every single day we hear about new disagreements and hurdles in the BBB process. Senate Finance Committee Chair Ron Wyden (D-Ore.), said in the Capitol Monday that there are more than 20 issues that he is “litigating” with the parliamentarian -- that’s a lot, in case you were wondering. We still haven’t gotten a final judgement on the immigration provisions. Separately, Sen. Bernie Sanders (I-Vt.) and Sen. Robert Menendez (D-N.J.) continue to disagree on the SALT tax cap. This would all have to be settled in order to move forward.

The Punchbowl story does not mention Senator Kyrsten Sinema as an obstacle to passage, which may support Jay Heflin's report yesterday that she is making her peace with BBB. She isn't saying.

For more background: What’s Happening with the Budget Reconciliation Tax and Spending Bill. 

Wyden Bill Faces Parliamentarian, IRS Deadline, Senate Crunch - Doug Sword and Benjamin Guggenheim, Tax Notes ($):

The most controversial section of the text released December 11 is an IOU for a tax policy, and the section’s author, Wyden, says he hopes to make further changes to the text before it hits the Senate floor.

The bill includes a hopefully phrased “placeholder for compromise on deduction for state and local taxes” — a task that might be easier said than done, considering the split among Democrats over the issue. Progressives are complaining about the giant boost in the SALT deduction cap from $10,000 to $80,000 that was in the House-passed bill, particularly after analyses showed that the benefit would go overwhelmingly to higher-income households.

There are at least two Senate proposals to alter the House-passed version, including a proposal from Sen. Bernie Sanders, I-Vt., to restore and extend the $10,000 cap while removing it for households making less than $400,000.

Manchin, Biden discuss ‘different iterations’ of spending bill as Democrats seek consensus - Tony Romm, Washington Post ($):

Joe Tries One More Time To Sell Joe on BBB - Renu Zaretsky, Daily Deduction. "President Joe Biden yesterday met with Sen. Joe Manchin to urge his support for passing Build Back Better (BBB) this year. But Manchin continues to raise concerns about inflation and the cost of BBB. Data released Friday show inflation at a nearly 40-year high."

GOP Plans To Target BBB Act's Long-Term Cost To Scuttle Bill - Alan Ota, Law360 Tax Authority ($):

Several senior Republicans said they would encourage undecided Democrats to oppose the emerging Senate version of the House-passed Build Back Better Act, H.R. 5367, by raising concerns about inflation and the fiscal impact of broad extensions of temporary items in the bill. A new study by the Congressional Budget Office found a potential package of permanent extensions of short-term tax breaks and some other items in the BBB Act would cost $3 trillion.

GOP lawmakers have emphasized the BBB Act's potential long-range impact on the deficit and inflation in trying to encourage Sens. Joe Manchin, D-W.Va., and Kyrsten Sinema, D-Ariz., to delay Senate action on the bill. The CBO previously projected the BBB Act would cost $367 billion over 10 years, not including $207 billion in projected new revenue from a proposed upgrade for the Internal Revenue Service and expanded tax enforcement.

Democrats note that Republicans have used the same "expiring provision" ploy to "pay for" things. Outsiders note that if an exchange-traded business counted like that, the SEC would take up permanent space in their offices.

As Dems sprint against the clock, child tax credit might slip away - Sarah Ferris and Marianne Levine, Politico. "Preserving the party’s expanded child tax credit, which delivers monthly checks to most families with children, has been a central tenet of Biden’s social safety net bill from the start. But months of grueling negotiations have forced Democrats right up against the Dec. 31 deadline that could blot out one of their biggest political wins this year."

Updated reconciliation text includes electric vehicle tax credit opposed by Manchin - Zack Budryk, The Hill. "Manchin, an essential vote in the 50-50 upper chamber, has spoken out against the tax credit for union-made electric vehicles in recent weeks, saying at a Toyota event in November that Congress 'shouldn’t use everyone’s tax dollars to pick winners and losers.' However, the inclusion of the provision in the early text suggests that Wyden, one of the chamber’s climate hawks, will at least attempt to include the tax credit in the final Senate bill."

Trudeau Says Canada Seeking To Offset US-Only EV Credit - Kevin Pinner, Law360 Tax Authority ($):

Canadian Prime Minister Justin Trudeau said Monday that his country has proposed aligning its electric vehicle tax credit regime with the U.S.' as one potential remedy for concerns that an American electric vehicle incentive plan would hurt Canadian industry.

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On Friday, Deputy Prime Minister Chrystia Freeland and International Trade Minister Mary Ng threatened top U.S. senators with tariffs in a letter, according to public broadcaster Canadian Broadcasting Corp. Canada's officials said the BBB's provisions would amount to a 34% tariff on Canadian-assembled electric vehicles and that the bill would violate the U.S.-Mexico-Canada Agreement.

Arkansas’s Sustainable Tax Reform: A Gift That Will Keep On Giving - Timothy Vermeer, Tax Foundation:

Faced not only with immediate surpluses but with the expectation of sustained revenue growth in coming years, Arkansas policymakers have chosen to return some of the additional revenue to taxpayers in the form of individual and corporate income tax rate reductions, with additional rate cuts if future revenues permit.

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The state’s two-front, revenue-based approach allows Arkansas to chart a responsible path to regional competitiveness while guarding against unforeseen economic downturns or inflation-related costs. If all the revenue triggers in the new law are enacted, Arkansas will no longer be an outlier in the region. Provided the state does not draw on its Catastrophic Reserve Fund between July 1, 2022 and January 1, 2024, the top individual rate would decrease to 5.1 percent at the start of tax year 2024. If no funds are transferred from the Catastrophic Reserve during calendar year 2024, the top rate would decrease further to 4.9 percent on January 1, 2025. That would position Arkansas as the median state relative to its neighbors with individual income taxes.

Similar potential exists for Arkansas’s corporate income tax. If all revenue triggers are met, the state’s top corporate rate will decrease from 5.7 percent (as of 2023) to 5.5 percent on January 1, 2024. It will then decline further to 5.3 percent on January 1, 2025.

Many states are discussing tax cuts after big revenue years in 2021. Stay tuned.

The Impact of the Infrastructure Investment and Jobs Act on Government Entities - Eric Berman, Eide Bailly. "Most analysts agree that the IIJA is the largest infusion of infrastructure funds since the creation of the interstate highway system in 1956."

Risk to Taxpayer Information Looms a Year After SolarWinds Hack - Lauren Loricchio, Tax Notes ($):

Despite assurances from state and federal officials that taxpayer information wasn’t breached in the SolarWinds Inc. supply chain hack that was detected last year, cybersecurity experts say it is hard to be certain that information wasn’t compromised.

Revenue departments in several states — including California, Delaware, North Carolina, North Dakota, Ohio, Pennsylvania, South Carolina, Tennessee, and Vermont — reported using SolarWinds software, though not all of them used the version that was compromised. The states did not report evidence of data breaches in the cyberattack and did not report abandoning the software. However, officials were reluctant to discuss specifics, citing the sensitive nature of the information.

Related: The Impact of a Cybersecurity Incident or Breach on Your Government Entity 2021/3

The Internal Revenue Leak Service - Wall Street Journal ($). "Democrats want to give $80 billion to the Internal Revenue Service to audit millions of Americans each year. Yet six months after the progressive website ProPublica first published the secret tax information of rich Americans, the tax agency still can’t explain what happened."

More Overlooked but Needed Tax Reforms - Annette Nellen, 21st Century Taxation. "If higher education incentives are retained, be sure they also cover post-secondary trade schools and only for reasonable costs."

Don't miss out on $300 ($600 for couples) charitable donation tax deduction, no itemizing needed - Kay Bell, Don't Mess With Taxes. "Tax changes in the wake of COVID now provide a $300 tax deduction for single philanthropic filers who don't itemize. Up to $600 in cash gifts can be claimed by married couples filing a joint return. The deduction is claimed directly on Form 1040, meaning there's no need to mess with Schedule A to get this tax benefit. Just enter your donation data on your 1040 or 1040-SR when you file your 2021 taxes next year."

Hobby Loss Tax Deduction Developments In 2021 - Peter Reilly, Forbes, "Section 183 is one of the few areas where I think tax advisers are too cautious. The law is clear that a realistic expectation of profit is not required to sustain a loss. What is required is an honest objective. Hence Reilly's Eighteenth Law of Tax Planning - Honest objective trumps realistic expectation. You demonstrate the honest objective by behaving in a businesslike manner."

Special Relief for Filing Schedules K-2 and K-3 for Short-Year Partnerships Published in FAQ by IRS - Ed Zollars, Current Federal Tax Developments. "The IRS is requiring partnerships that have international tax information to prepare and attach Schedules K-2 and K-3 to partnerships whose tax year begins in 2021.  However, the final versions of these forms are not available currently, which could present a problem for a fiscal year partnership that began operations in 2021, but whose year-end for its first income tax return is before the end of 2021.  As well, partnerships that are not in existence at year end may face a similar problem complying with the reporting requirements."

Is My Foreign Retirement Account Subject to IRS Information Return Reporting (FBAR, 3520, etc.)? - Matthew Roberts, Freeman Law. "Thus, it is clear that the IRS views many foreign retirement accounts as 'foreign trusts. for United States reporting purposes. This is significant:  as discussed more fully below, the civil penalties for failure to timely report interests in or transactions with foreign trusts can reach up to 35% of the amount held in the foreign trust or the amount of any contributions to or distributions from the foreign trust."

Related: Offshore Voluntary Disclosure. 

Start me up. A California couple deducted around $25,000 in expenses for a Mojave Desert project called "Paradise Acres." The Tax Court called a false start.

Judge Nega sets the stage: 

In 2012 or 2013 petitioner husband purchased 10 acres of property in Newberry Springs, California (property). The property was in the middle of the Mojave Desert, approximately 1 mile away from any road and 120 miles away from petitioners' residence. Petitioner husband purchased the property with the intent of developing its natural resources, making it accessible by road, procuring a certification for organic farming, dividing it into parcels, and then renting the parcels to farmers. 

While the IRS system for selecting returns to examine is opaque, it seems that business losses without revenue is an audit trigger. The IRS disallowed the expenses on the grounds that the business had not yet begun. Judge Nega considers the rules: 

A taxpayer has not “'engaged in carrying on any trade or business' within the intendment of section 162(a) until such time as the business has begun to function as a going concern and performed those activities for which it was organized.” Until that time, expenses related to that activity are not “ordinary and necessary” expenses currently deductible under section 162 (or under section 212) but, rather, are classified as “start-up” or “pre-opening” expenses subject to section 195.

So, was the business underway (my emphasis)?

Although petitioner husband explored the property and conducted a number of experiments on it, those actions exemplify steps taken to set up a business; they do not indicate that a business has actually commenced and is presently operating as a going concern.

Moreover, petitioners failed to establish that petitioner husband completed any of the steps set forth in his business plan for the Paradise Acres venture. By the end of 2015 petitioner husband had not finished constructing the nonlivable outdoor structure, procured an organic farming certification from the USDA, or finished installing the irrigation system. Because of petitioner husband's failure to complete any of the steps in his business plan, we are not persuaded that the Paradise Acres venture was an active trade or business in 2015 for purposes of section 162.

Assuming, arguendo, that none of the steps in petitioner husband's business plan was necessary to rent the property, petitioners nevertheless failed to produce any evidence to establish that petitioner husband held the property out for rent during 2015. Other than petitioner husband's incredible testimony, petitioners failed to produce any evidence to establish that petitioner husband was actively managing and engaging with potential customers to rent the property during 2015 or that he received any offers from potential customers.

"Incredible" doesn't appear to be a good thing here.

The judge upheld the IRS disallowance of the expenses.

The Moral? Costs incurred in a business prior to commencement of operations are capitalized. They may be deducted to a limited extent once the business begins, generally over a 180-month period. Good recordkeeping helps document the expenses and the start-up date.

Link: T.C. Memo. 2021-138

It appears the judge wasn't impressed by this taxpayer's arguments. From a recent Wisconsin case (taxpayer name omitted):

In January 2019, the United States filed this action, seeking to reduce federal tax assessments to judgment and foreclose tax liens against Defendant Taxpayer's real estate. For nearly three years, Taxpayer has hamstrung the proceedings through meritless motions, excessive malingering, and bad faith excuses. That ends today.

These are the days. I am reliably informed that we are in the Halcyon Days. "Halcyon Days technically fall in December around the time of the winter solstice each year. Their story goes back to Ancient Greece — of love, gods and goddesses, tragedy on the seas, and birds with magical powers. Halcyon Days are kind of unique as days go. They refer to a period of happiness and calm — especially in the past." It is also National Free Shipping Day, so perhaps these are the best of times.