The IRS has corrected Notice 2019-20, which provided a waiver of penalties under Code Secs. 6722(failure to furnish correct payee statements) and 6698 (failure to file partnership return) for certain partnerships that file and furnish Schedules K-1 to Form 1065 without reporting negative tax basis capital account information. The updated Notice extends the penalty waiver to Code Secs. 6038(b)and (c) and any other section of the Code, for partnerships that fail to file and furnish Schedules K-1 or any other form or statement to Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, for any penalty that arises solely as a result of failing to include negative tax basis capital account information.

The IRS has corrected Notice 2019-20, which provided a waiver of penalties under Code Secs. 6722(failure to furnish correct payee statements) and 6698 (failure to file partnership return) for certain partnerships that file and furnish Schedules K-1 to Form 1065 without reporting negative tax basis capital account information. The updated Notice extends the penalty waiver to Code Secs. 6038(b)and (c) and any other section of the Code, for partnerships that fail to file and furnish Schedules K-1 or any other form or statement to Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, for any penalty that arises solely as a result of failing to include negative tax basis capital account information.

The penalty relief applies only for tax years beginning after December 31, 2017, but before January 1, 2019.

The IRS will waive the penalty only if both of the following conditions are met:

• the partner Schedules K-1 are timely filed (including extensions) with the IRS, timely furnished to the partners, and contain all other required information; and
• the person or partnership required to file the Schedule K-1 or other applicable form or statement files with the IRS, no later than one year after the original, unextended due date of the form to which the Schedule K-1 or other applicable form or statement must be attached, a schedule setting forth the information listed below for each partner for which negative tax basis capital account information is required.

The required schedule must state:

1. the partnership’s name and Employee Identification Number, if any, and Reference ID Number, if any;
2. the partner’s name, address, and taxpayer identification number; and
3. the amount of the partner’s tax basis capital account at the beginning and end of the tax year at issue.

The schedule should be captioned "Filed Under Notice 2019-20" and should accord with instructions and additional guidance provided by the IRS. The schedule should be sent to: 1973 North Rulon White Blvd., Ogden, UT 84404-7843, MS 4700, Attn: Ogden PTE.

The upper-tier controlled foreign corporation (CFC) partners of a domestic partnership were required to include in gross income their distributive share of income inclusions under subpart F from lower-tier CFCs, and increase earnings and profits (E&P) by the same amount. Regulations under Code Sec. 964provided preliminary steps for conforming a foreign corporation’s profit and loss statement to that of a domestic corporation. The general rules of Code Sec. 312 that governed earnings and profits computations of domestic corporations then applied.

The upper-tier controlled foreign corporation (CFC) partners of a domestic partnership were required to include in gross income their distributive share of income inclusions under subpart F from lower-tier CFCs, and increase earnings and profits (E&P) by the same amount. Regulations under Code Sec. 964provided preliminary steps for conforming a foreign corporation’s profit and loss statement to that of a domestic corporation. The general rules of Code Sec. 312 that governed earnings and profits computations of domestic corporations then applied.

Interaction Between 964 and 312

The rules in Code Sec. 964(a) provide that, with an exception for a depreciation rule in Code Sec. 312(k)(4), the earnings and profits of a foreign corporation are computed according to rules substantially similar to those that apply to domestic corporations, under regulations prescribed by the Secretary. The Tax Court found that regulations reasonably could be read to include regulations under Code Sec. 312.

The Code Sec. 964 regulations required the following steps be taken before the Code Sec. 312 rules could be applied:

• preparation of a profit and loss statement;
• U.S. accounting adjustments; and
• tax adjustments.

The general rules of subpart F and Code Sec. 312applied because there were no specific rules covering the treatment of a CFC’s distributive share of partnership income, or subpart F income inclusions, specifically. Subpart F required upper-tier CFC partners to compute gross income as if they were domestic corporations. As partners in a domestic partnership, they were required to include their distributive shares of the partnership’s income, including subpart F income inclusions, from lower-tier foreign corporations.

Under the Code Sec. 312 regulations, E&P is determined by taking into account all items includible in gross income under Code Sec. 61. Because the inclusions under subpart F were included in gross income, E&P was increased by those amounts.

Dissenting Opinion

A dissenting opinion disagreed with the Tax Court’s conclusion that Code Sec. 964 incorporated the rules of Code Sec. 312 based on the reference to the depreciation rule. The dissent also disagreed with the Tax Court’s statement that Code Sec. 964 provided that the same general rules apply to E&P computations for domestic and foreign corporations because the statute referred to rules "substantially similar" to those applicable to domestic corporations.

The IRS has issued proposed regulations on the information reporting requirements under Code Secs. 101(a)(3) and 6050Y, added by the Tax Cuts and Jobs Act ( P.L. 115-97). The regulations are to apply to reportable life insurance policy sales made, and reportable death benefits paid, after December 31, 2017. Transition relief applies until these regulations are finalized.

The IRS has issued proposed regulations on the information reporting requirements under Code Secs. 101(a)(3) and 6050Y, added by the Tax Cuts and Jobs Act ( P.L. 115-97). The regulations are to apply to reportable life insurance policy sales made, and reportable death benefits paid, after December 31, 2017. Transition relief applies until these regulations are finalized.

Reportable Sales and Payments

New reporting requirements apply to reportable policy sales and payments of reportable death benefits occurring after December 31, 2017.

New Code Sec. 6050Y imposes information reporting obligations related to certain life insurance contract transactions, including reportable policy sales and payments of reportable death benefits. The proposed regulations specify how and when the information reporting obligations must be satisfied. They also provide definitions and rules governing the application of the information reporting obligations.

New Code Sec. 101(a)(3) defines "reportable policy sale" and provides rules for determining the amount of death benefits excluded from gross income following a reportable policy sale. The proposed regulations provide definitions and guidance for determining the amount of death benefits excluded.

Proposed Regulations

The proposed regulations respond to comments generated by the IRS’s pre-regulatory guidance in Notice 2018-41, I.R.B. 2018-20, 584, and provide clarifications.

Payments. The proposed regulations clarify that a reportable policy sale payment includes any amount of the recipient’s debt assumed by the acquirer in addition to cash and the fair market value of property. They also clarify that when an acquirer makes installments payments in more than one year, the acquirer reports the total amount of all payments in the year of the policy sale. The Treasury Department and the IRS are considering whether reportable policy sale payments should be defined to exclude payments of any ancillary costs and expenses. Comments are requested regarding the types of payments made by acquirers in reportable policy sales, the recipients of those payments, and existing reporting requirements applicable to those payments.

Reportable death benefits. Reporting requirements apply to any person that makes a payment of reportable death benefits during any tax year. The proposed regulations clarify that the amounts must be attributable to an interest in the life insurance contract that was transferred in a reportable policy sale. For instance, if the original policyholder of a life insurance contract transfers a 50 percent interest in the life insurance contract in a reportable policy sale, amounts paid due to the death of the insured that are attributable to the 50 percent interest retained by the original policyholder are not reportable death benefits.

Comments are requested as to whether reportable death benefits payment recipients should include, in addition to any person that receives reportable death benefits as a beneficiary under the life insurance contract, any person that receives reportable death benefits as the holder of an interest in the life insurance contract.

Payor. The proposed regulations define "payor" to mean any person making a payment of reportable death benefits, and "reportable death benefits payment recipient" to mean any person that receives reportable death benefits as a beneficiary under the life insurance contract or as the holder of an interest in the life insurance contract. However, comments are sought on whether "payor" should be defined the same as "issue," or should also include any holder of an interest in a life insurance contract that receives reportable death benefits attributable to that interest and is contractually obligated to pay part or all of the proceeds to the beneficial owner of the interest.

Unified reporting. The proposed regulations allow for unified reporting by the acquirers in a series of prearranged transfers of any interest in a life insurance contract. A series of prearranged transfers of an interest in a life insurance contract may include transfers in which one or more persons serve as intermediaries. Such intermediaries may acquire title or possession of an interest in a life insurance contract for state law purposes as nominee on behalf of another person or persons.

Deadlines. The proposed regulations provide that an acquirer must furnish any written statement required to be provided to a reportable policy sale payment recipient no later than February 15 of the year following the calendar year in which the reportable policy sale occurs. The proposed regulations adopt this deadline because a person may be both a reportable policy sale payment recipient and a seller regarding a reportable policy sale, and the deadline for an acquirer to furnish a written statement to a reportable policy sale payment recipient coordinates with the deadline for an issuer that receives a reportable policy sale statement (RPSS) to furnish a written statement to a seller. An acquirer must furnish an RPSS to the issuer by the later of (1) 20 days after the reportable policy sale, or (2) 5 days after the end of the applicable state law rescission period. However, if the later date is after January 15 of the year following the calendar year in which the reportable policy sale occurred, the RPSS must be furnished by January 15 of the year following the calendar year in which the reportable policy sale occurred.

A payor of reportable death benefits must furnish any written statement required to be provided to a reportable death benefits payment recipient no later than January 31 of the year following the calendar year in which the reportable policy sale occurs. The proposed regulations use January 31 because it is generally the deadline for furnishing copies of Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., to recipients.

Forms 1099-LS and 1099-SB. The proposed regulations provide guidance to sellers of life insurance contracts in reporting gain. IRS Form 1099-LS, Reportable Life Insurance Sales, and Form 1099-SB, Seller’s Investment in Life Insurance Contract, provide specific instructions on these reporting requirements. The proposed regulations also provide guidance to payors of reportable death benefits (reportable on Form 1099-R) and how to calculate the amount of death benefits excluded from gross income.

Transition Relief

Transition relief applies for reportable policy sales and payments of reportable death benefits occurring after December 31, 2017, and before the date final regulations are published in the Federal Register.

For reportable policy sales,

• statements required to be furnished to issuers under Code Sec. 6050Y(a)(2) must be furnished by the later of the applicable deadline in the final regulations or 60 days after the date final regulations are published in the Federal Register;
• returns required to be filed under Code Sec. 6050Y(a)(1) and (b)(1) and statements required to be furnished to payment recipients and sellers under Code Sec. 6050Y(a)(2) and (b)(2)must be filed or furnished by the later of the applicable deadline in the final regulations or 90 days after the date final regulations are published in the Federal Register;

For payments of reportable death benefits, returns required to be filed under Code Sec. 6050Y(c)(1) and statements required to be furnished to payment recipients under Code Sec. 6050Y(c)(2) must be filed or furnished by the later of the applicable deadline in the final regulations or 90 days after the date final regulations are published in the Federal Register.

Comments. The IRS is seeking comments on a range of issues connected with these proposed regulations. Written or electronic comments must be received by May 9, 2019. A public hearing has been scheduled for June 5, 2019, at 10:00 a.m., in the IRS Auditorium, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 15 minutes before the hearing starts. For more information about having your name placed on the building access list to attend the hearing, see the "FOR FURTHER INFORMATION CONTACT" section of the preamble.

Nina E. Olson, the National Taxpayer Advocate (NTA), has announced her decision to retire this summer from the esteemed NTA position at the IRS. Olson has served as taxpayers’ "voice" within the IRS and before Congress for the last 18 years.

Nina E. Olson, the National Taxpayer Advocate (NTA), has announced her decision to retire this summer from the esteemed NTA position at the IRS. Olson has served as taxpayers’ "voice" within the IRS and before Congress for the last 18 years.

Olson will retire from the position of NTA on July 31, 2019, according to a recent NTA Blog post. "I am making the announcement now because I want to prepare the Taxpayer Advocate Service for a smooth transition, and I want to participate in the selection of my successor," Olson wrote.

Critical and Priority Items Lists

Olson outlined the following "critical items" she wants to accomplish before retiring:

• publish new IRM chapters on Taxpayer Assistance Orders and Taxpayer Advocate Directives;
• finalize a regulation governing the operations of Low Income Taxpayer Clinics (LITC); and
• regain the ability to hire attorney-advisors.

Additionally, Olson has created a list of "priority items" for the IRS, which IRS Commissioner Charles Rettig requested. The list includes:

• developing an automated economic hardship risk indicator;
• developing mandatory employee training on the Taxpayer Bill of Rights;
• developing guidance and training on the identification and public disclosure of Program Manager Technical Advice (PMTA) memoranda; and
• designing rights-based notices of deficiency, collection due process hearing notices, and math error notices.

"Underlying all my actions and plans as the National Taxpayer Advocate has been a recognition that the Taxpayer Advocate Service is more than an organization – however independent – within a bureaucratic federal agency," Olson wrote. "The Taxpayer Advocate Service is a concept – an idea. It represents the proposition that taxpayers have rights and protections before the awesome taxation powers of the United States."

People are buzzing about Roth Individual Retirement Accounts (IRAs). Unlike traditional IRAs, "qualified" distributions from a Roth IRA are tax-free, provided they are held for five years and are made after age 59 1/2, death or disability. You can establish a Roth IRA just as you would a traditional IRA. You can also convert assets in a traditional IRA to a Roth IRA.

Before 2010, only taxpayers with adjusted gross income of $100,000 or less were eligible to convert their traditional IRA (provided they were not married taxpayers filing separate returns). Beginning in 2010, anyone can convert a traditional IRA to a Roth IRA, regardless of income level or filing status.

Comment: While you can only contribute a maximum of $5,000 to a Roth IRA for 2010 (plus a $1,000 catch-up contribution if you are over age 50), you can convert an unlimited amount from a traditional IRA.

Conversion is treated as a taxable distribution of assets from the traditional IRA to the IRA holder, although it is not subject to the 10 percent tax on early distributions. While paying taxes on conversion is undesirable, the advantages of holding assets in a Roth IRA usually outweigh this disadvantage, especially if you will not be retiring soon. Furthermore, if you convert assets in 2010, you have the option of including them in income in 2011 and 2012 (50 percent each year) instead of 2010.

Comment: Generally, this income-splitting would be advantageous to any taxpayer who does not expect a sharp increase in income in 2011 or 2012. A wildcard factor is that the lower income tax rates that have been in effect since 2001 will expire after 2010 and could increase in 2011.

There are four ways to convert a traditional IRA to a Roth IRA:

• A rollover - you receive a distribution from a traditional IRA and roll it over to a Roth IRA within 60 days;
• Trustee-to-trustee transfer - you direct the trustee of the traditional IRA to transfer an amount to the trustee of a Roth IRA;
• Same-trustee transfer - the trustee of the traditional IRA transfers assets to a Roth IRA maintained by the same trustee; or
• Redesignation - you designate a traditional IRA as a Roth IRA, instead of opening a new Roth account.

Comment: The account holder does not have to convert all of the assets in the traditional IRA.

Another advantage of converting assets from a traditional IRA to a Roth IRA is that you can change your mind and put the assets back into the traditional IRA. This is known as a recharacterization. You have until the due date, with extensions, for the return filed for the year of conversion. Thus, if you convert assets in 2010, you have until mid-October in 2011 to undo the conversion.

This ability to recharacterize the conversion allows you to use hindsight to check whether your assets declined in value after the conversion. Since you are paying taxes on the amount converted, a decline in asset value means that you paid taxes on phantom income that no longer exists. However, if you convert assets into multiple Roth IRAs, you can choose to recharacterize the assets in a Roth IRA that decreased in value, while maintaining the conversion for a Roth IRA's assets that appreciated in value.

The use of a Roth IRA can be a savvy investment, but whether to convert assets is not an easy decision. If you would like to explore your options, please contact this office.

Yes, but only for a limited time. In late December 2009, Congress passed the 2010 Defense Appropriations Act (2010 Defense Act). The new law temporarily extends the eligibility period for COBRA premium assistance through February 28, 2010 and the duration of the subsidy for an additional six months (up to 15 months).

Reduced premiums

Individuals who are involuntarily separated from employment between September 1, 2008 and February 28, 2010 may be able to make reduced premium payments for COBRA continuation coverage. Instead of paying the full monthly premium, assistance eligible individuals pay 35 percent of the premium and their former employers pay the remaining 65 percent of the premium. The former employer is reimbursed by a payroll tax credit.

Extension

Originally, Congress set a December 31, 2009 deadline for eligibility for COBRA premium assistance. The 2010 Defense Act extended the deadline for eligibility to February 28, 2010. The 2010 Defense Act also extended the maximum period for receiving the subsidy an additional six months (from nine to 15 months).

In some cases, an individual may have exhausted his or her nine months of COBRA premium assistance before Congress approved the extension. The 2010 Defense Act provides an extended period for the retroactive payment of the individual's 35 percent payment. To continue coverage, the assistance eligible individual must pay the 35 percent of premium costs by February 17, 2010 or, if later, 30 days after notice of the extension is provided by their plan administrator.

In other cases, an individual may have exhausted his or her nine months of COBRA premium assistance and paid 100 percent of the COBRA premium for December. Individuals who paid the full COBRA premium in December are entitled to a refund under the 2010 Defense Act.

Automatic

Individuals who qualify for COBRA premium assistance are automatically eligible to pay reduced premiums for up to six more months for a total of 15 months. The individual must continue to be eligible for the subsidy. If he or she becomes eligible for other group health coverage (such as a spouse's plan) or Medicare the individual is no longer eligible for COBRA premium assistance.

Income limits

Higher-income individuals may qualify for COBRA premium assistance but find they have to repay it. If an individual's modified adjusted gross income for the tax year in which the premium assistance is received exceeds $145,000 (or $290,000 for married couples filing a joint return), the amount of the subsidy during the tax year must be repaid. For taxpayers with adjusted gross income between $125,000 and $145,000 (or $250,000 and $290,000 for married couples filing a joint return), the amount of the premium reduction that must be repaid is reduced proportionately.

Higher-income individuals may permanently waive the right to COBRA premium assistance. However, they may not later obtain the subsidy if their adjusted gross incomes end up below the limits. Our office can help you decide which option is best.

Possible extension

Many lawmakers in Congress support extending eligibility for COBRA premium assistance beyond February 28, 2010. In fact, the House of Representatives approved a bill in December extending eligibility through June 30, 2010. However, the Senate has yet to vote on the bill. Our office will keep you posted of developments.

The new "new homebuyer" tax credit

The homebuyer tax credit would have expired on November 30, 2009 had Congress not extended the credit. The new credit is extended to homes purchased before (1) May 1, 2010, or (2) July 1, 2010 if the taxpayer enters into a written binding contract before May 1, 2010 to close on the home before July 1, 2010. The credit amount remains at a maximum of $8,000, or 10 percent of the home's purchase price (whichever is less). However, the new law places a cap on the home's purchase price, which cannot exceed $800,000 in order to claim the credit. In addition, a modified credit is available for "repeat" homebuyers, discussed below.

Comment. The "first-time homebuyer credit" is somewhat of a misnomer. Under the original - and now extended - credit, you did not (and still do not) technically have to be purchasing your very first home to qualify for and take the credit. A first-time homebuyer for purposes of the $8,000 credit is a taxpayer who an individual (and spouse, if married) who had no present ownership interest in a principal residence during the three-year period ending on the date the home is purchased. This means that you could have previously owned a home as long as you have not had any ownership interest in a personal residence for at least the three years prior to purchasing the home for which you are claiming the credit.

Congress raises income limits

The homebuyer tax credit is also now available to a greater segment of the home-buying population. The new law has increased the income limits that phase out the credit, allowing higher income individuals and families to qualify.Phase-out of the credit begins under the new law at $125,000 modified adjusted gross income (AGI) for single taxpayers (up from $75,000) and at $225,000 for married taxpayers filing joint returns (up from $150,000). The phaseout range itself is $20,000, thereby reducing the credit to zero for individual taxpayers with modified AGI of more than $145,000 ($245,000 for married joint filers). The credit is reduced proportionately for taxpayers with modified AGIs between these amounts.

"Long-time" homeowners qualify for reduced $6,500 credit

A reduced homebuyer tax credit may be claimed by existing homeowners who have owned and lived in their home for a long period of time. The reduced tax credit, of up to $6,500, may benefit long-time homeowners who are ready to move up or simply move on from their current home. The tax credit is equal to 10 percent of the home's purchase price up to a maximum of $6,500. Purchases of homes priced above $800,000 are not eligible for the tax credit.

To qualify for the reduced $6,500 credit, you must be a "long-time resident" as defined by the law. For purposes of the credit, a "long-time resident" is defined as a person who has owned and resided in the same home for at least five consecutive years of the eight years prior to the purchase of the new residence. Importantly, for married taxpayers, the law tests the homeownership history of both the spouses.

If you are an existing, repeat homebuyer who qualifies for the reduced credit, you do not have to purchase a home that is more expensive than your previous home to qualify for the tax credit. There is no requirement that the new principal residence be a "move up" property; it can be less expense than your former home. However it must be your new "principal residence" in order to claim the credit. Moreover, a repeat homebuyer does not need to sell or otherwise dispose of his or her current residence to qualify for the $6,500, either, as long as your new home becomes your principal residence.

Example. Bob and Edith are married and are both eligible to claim the reduced $6,500 credit for existing "long-time residents." Their modified AGI is $240,000, which results in being $15,000 over the beginning of the phaseout for married taxpayers filing jointly. They will be able to claim a partial reduced homebuyer credit in the amount of $1,650 (15,000/$20,000 = 0.75; 1.0-0.75 = 0.25. $6,500 x 0.25 = $1,625).

While the homebuyer credit can be very valuable, it is also very complex. In addition to the provisions we have described, there are special rules for repayment, new documentation requirements, a purchase price cap, and more. Please contact our office for more details about the first-time homebuyer credit.