Tax News & Views Collections and Jello Roundup

Publication note: I will be taking a three-week vacation starting next week. Trina Pinneau, Jenny McGarry, and Bailey Finney will be handling the roundups. There will be roundups Monday, Wednesday and Friday next week, with a five-day posting schedule resuming the following week. See you in August!

IRS reports collecting $1 billion from rich households’ back taxes - Julie Zauzmer Weil, Washington Post:

The IRS reported Wednesday that it has collected $1 billion in taxes and penalties owed by hundreds of wealthy households who accumulated past-due tax debts for years IRS enforcement dwindled.

“The tax bill wasn’t even in dispute — the taxes were clearly owed by these people,” IRS Commissioner Danny Werfel said in a call with reporters. “But we didn’t have the people or the resources. … It takes time and staffing to work through these cases.”

IRS tops $1 billion in past-due taxes collected from millionaires; compliance efforts continue involving high-wealth groups, corporations, partnerships - IRS:

As part of larger efforts taking place, the IRS has stepped up activity specifically on 1,600 individuals whose incomes were more than $1 million per year and who each owed the IRS more than $250,000 in recognized tax debt. Since last fall, this IRS compliance effort has generated more than $1 billion in collections from this group, with work continuing in this area.

IRS Secures $1 Billion in Wealthy Tax Debts - Benjamin Valdez, Tax Notes ($):

Elyse Katz of Eide Bailly LLP was less impressed with the milestone, in part because the agency is taking collection action on accounts that it already knows owe tax.

Katz said she doesn’t see the effort as a new initiative but rather “mainly the IRS coming out of hibernation from putting all collection on hold during the pandemic.”

Will IRA Energy Credits Stick Around?

Energy Credits a Sticking Point in GOP’s Hopes for Tax Package - Samantha Handler and Chris Cioffi, Bloomberg ($):

Some top Republicans say rolling back the credits could help pay for an extension of the 2017 tax law provisions that expire at the end of next year. Former President Donald Trump, too, has pledged to seek repeal of the credits if he wins another term.

...

When House Republicans attempted to claw back energy credits last year during negotiations to raise the debt limit, they were only able to pass a bill doing so after removing some roll-back of biofuel credits at the instance of the Iowa delegation. The bill never got a vote in the Democratic-controlled Senate.

Still?

Texas Court Wipes Out Home Distilling Ban Hangover in Tax Code - Mary Katherine Browne, Tax Notes ($):

A district court overturned a 156-year ban on at-home distilling after determining that the ban was an improper use of the government’s taxing authority and wasn’t necessary and proper in reducing tax evasion.

In a July 10 opinion in Hobby Distillers Association v. Alcohol and Tobacco Tax and Trade Bureau, Judge Mark T. Pittman of the U.S. District Court for the Northern District of Texas permanently enjoined the government from enforcing section 5178(a)(1)(B) or any regulation promulgated under that section, declaring the code section to be unconstitutional.

...

Pittman sided with the Hobby Distillers Association and granted a permanent injunction against enforcement, stating that the law wasn’t a valid use of Congress’s taxing power and had little to do with the actual imposition of tax. According to Pittman, all the statute does is “ferment a crime.”

Could I just call it it "biofuel" and apply for a tax credit?

Be Careful

IRS reminds car dealers and sellers to be aware of phishing scams - IRS:

In light of the recent ransomware attack aimed at car dealers, the IRS is warning individuals and businesses to remain vigilant against these attacks. Fraudsters and identity thieves attempt to trick the recipient into clicking a suspicious link, filling out personal and financial information or downloading a malware file onto their computer.

...

Never click on any unsolicited communication as it may surreptitiously load malware. It may also be a way for malicious hackers to load ransomware that keeps the legitimate user from accessing their system and files.

In some cases, phishing emails appear to come from a legitimate sender or organization that has had their email account credentials stolen. Setting up two-factor or multi-factor authentication with their email provider will reduce the risk of individuals having their email account compromised.

Insurance-funded Buy-out Trap

The Supreme Court Blows Up a Popular Small-Business Succession Plan - Laura Saunders, Wall Street Journal:

The Court’s little-noticed decision in Connelly v. United States, issued in June, throws a wrench into a common succession strategy for many closely held firms with more than one owner. In this strategy, a company buys life insurance on its owners so that when one dies, there’s cash to repurchase his or her stock.

...

For owners who might be affected by Connelly, here are moves to consider.

Begin by checking the company’s buy-sell agreement, especially if no one has reviewed it in years.

International Corner

Americans Overseas Ask for Clarity In Foreign Trust Regs - Natalie Olivo, Law360 Tax Authority ($):

Treasury "should simply tell taxpayers" that certain frequently encountered arrangements, including various U.K. pension plans, are not trusts subject to U.S. reporting rules, according to a letter sent Monday by American Citizens Abroad. The group argued for clarifications around foreign pensions and other offshore trusts in response to regulations, proposed in May, that cover requirements for reporting transactions with foreign trusts to the Internal Revenue Service, including the receipt of large gifts.

Wealthy French Spooked by Election Explore Possible Moves Abroad - Tara Patel, Bloomberg: "The New Popular Front — which includes Socialist, Green and the France Unbowed parties — promised to pass a law to “abolish the privileges of billionaires.” In addition to reinstating a wider wealth tax, their platform called for scrapping France’s flat tax and reviving an exit levy, raising income taxes to a top marginal rate of 90% and overhauling succession rules to include a cap on inheritance."

Barriers to G20 Billionaire Tax Plan Are a Blessing in Disguise - Alan Cole, Tax Foundation via Bloomberg:

Gabriel Zucman, the wealth tax proponent, argues that wealth taxes—for example, by turning a wealth figure into an implied income figure—can be designed to fall within an income tax framework, but certain counterexamples present difficulties.

Consider a wealthy founder and shareholder of a valuable company whose value declines during the year, and who doesn’t sell any of his shares. Such a shareholder would have high wealth but negative unrealized income and no realized income. It likely would be difficult to justify a tax on this shareholder in income tax terms, despite his wealth.

Surviving the Cliff - Alex Parker, Things of Caesar. "In 2025, Congress will look at overhauling the entire tax code. But the international portion could see fewer changes than the rest."

Blogs & Bits

Nebraska consumption tax effort suffers EPIC fail - Kay Bell, Don't Mess With Taxes. "'The longshot petition to let voters replace property, income and corporate taxes with a consumption tax fell short of a bulk signature-gathering hurdle that often stops ballot initiatives that lack paid circulators,' reported the Nebraska Examiner."

IRS Should Ensure Customer Service Enhancements Are Accessible for Taxpayers with Disabilities - Erin Collins, NTA Blog. "Despite mentioning several times in the IRS Strategic Operating Plan that customer service enhancements will be usable by all taxpayers, including those with disabilities, the plan offers few details on how the IRS intends to make this statement a reality.

IRS Issues Final Regulations and Other Guidance on Digital Asset Transactions - Parker Tax Pro Library. "The IRS issued final regulations requiring custodial brokers to report sales and exchanges of digital assets, including cryptocurrency, that take place beginning in calendar year 2025; the regulations also provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions."

3 Ways To Safeguard Finances Of The Vulnerable, Yet Navigate U.S. Tax - Virginia La Torre Jeker, US Tax Talk. "The rise of AI has made scams increasingly sophisticated and more convincing to potential victims. When combined with cognitive issues due to aging or disabilities, these scams pose significant financial risks for vulnerable individuals. Family members often want to help. For those with global financial assets, multinational families and Americans living abroad, greater challenges are faced due to geographical distance and more complex U.S. tax laws."

Campaign Fund Watch

Former Illinois state senator, gubernatorial candidate sentenced to 42 months in prison for fraudulent use of campaign funds, money laundering, and tax evasion - IRS:

Former Illinois State Senator William Samuel McCann Jr was sentenced on July 9, 2024, to 42 months of imprisonment, to be followed by two years of supervised release, and ordered to pay $683,816.61 in restitution for fraudulent use of campaign funds, money laundering and tax evasion.

...

McCann also converted more than $100,000 in campaign funds for payment of personal expenses including Green Dot credit card payments related to a family vacation in Colorado and other personal expenses; charges from Apple iTunes, Amazon, a skeet and trap club, Cabela’s, Scheels, Best Buy, and a gun store; and cash withdrawals.

In relation to his joint return for calendar year 2018, McCann failed to report income from his 2018 rental payments to himself for the RV trailer and motor home. In addition, in March 2018, McCann used a $10,000 check issued by a campaign account to make a down payment to a Shipman, Illinois, business for a motor home. When the purchase was not completed, the business issued a $10,000 refund check payable to William McCann, which he deposited to his personal checking account and failed to report as income received.

Don't do that.

Long Working Days

Tax Court Denies Real Estate Loss Deduction To Builder - Anna Scott Farrell, Law360 Tax Authority ($). "The U.S. Tax Court said Thursday that it didn't believe a man who claimed to work an extra 48 hours a week beyond his regular full-time job to build a short-term rental property, denying him a $22,000 rental real estate loss deduction reserved for real estate professionals."

This case involves the Section 469 "passive loss" rules. Under these rules, a "passive" loss is typically only allowed to the extent there is passive income, or when the "passive activity" (my favorite nonsensical tax term) is sold.

Passive losses are business losses (Schedule C, E, or F) from a business activity in which the taxpayer fails to achieve "material participation," based on time spent in the business. Unless you are a "real estate professional," rental losses are automatically passive, regardless of the amount of time spent.

It's tough to be a real estate professional. You have to clear two hurdles:

- You have to spend at least 750 hours in the tax year working in a real estate trade or business, and

- You have to spend more time in real estate than you do in anything else.

If you have a full-time job other than in real estate, it's hard to work more real estate hours than in your full-time job. Yet that's what the taxpayer in this case claimed. Tax Court Special Trial Judge Leyden doubts it (taxpayer name omitted):

Taxpayer testified that he spent approximately 2,500 hours constructing the carriage house in 2020. He testified that he constructed the carriage house after work and on the weekends, as well as during two weeks of vacation from his full-time job. While the Court believes that Taxpayer spent a lot of time constructing the carriage house, it does not find it credible that Taxpayer spent more hours constructing the carriage house than he did at his full-time job. The Court finds it implausible that Taxpayer, as he asserts, would work 40 hours each week at a full-time job and at the same time work about an additional 48 hours each week constructing the carriage house

The moral? Extraordinary claims require extraordinary evidence. And if you want to claim non-passive losses for anything short of a full-time job, maintain a daily calendar to clock your hours and be ready to show receipts.

What day is it?

It's National French Fry Day, National Eat Your Jello Day, and National Pecan Pie Day. That covers breakfast, anyway.

Tax News & Views Collections and Jello Roundup

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Joe B. Kristan, CPA