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Saturday, July 06, 2019

Update: Appellate Court Upholds Denial of Charitable Deduction for Reporting Omission

Back in 2017, I discussed the case of Reri Holdings I, LLC here. There, the Tax Court denied a charitable deduction of over $33 million since the taxpayer did not include the adjusted basis information for the property in its Form 8283 filing. The Tax Court concluded that the substantial compliance doctrine could not be used by the taxpayer to salvage the deduction since the reporting of the basis, while not directly relevant to a charitable deduction, would have assisted the IRS in evaluating the contribution without an audit since a large disparity between basis and the value of the deduction would alert the IRS to potential issues.

The case was affirmed by the D.C. Court of Appeals in May of this year.

RERI Holdings I, LLC, 149 TC 1 (2017), aff’d, D.C. Court of Appeals, No. 17-1266 (May 24, 2019)

Employers Can Truncate Employee Social Security Numbers on Forms W-2

In an effort to reduce identity theft, the IRS has issued final regulations that permit employers to truncate the social security numbers of employees on Forms W-2. Thus, the employer can elect to report the number in the format of XXX-XX-1234 or ***-**-1234 instead of providing the whole number. It is not a mandatory provision – the employer can choose to do it if it wants.

Full taxpayer identification numbers are still required on the copies of the Forms W-2 that are filed with the Social Security Administration, and on those of payers of third-party sick pay to employers.

The regulations are effective for items filed or furnished after December 31, 2020.

TD 9861

Sunday, June 30, 2019

Good News/Bad News on GILTI Exclusion for Highly Taxed Income

I noted in my February 23, 2018 posting that the taxation of GILTI under Code §951A does not apply to foreign base company income and insurance income that is excluded from Subpart F by reason of being highly taxed by a foreign country. The way the statute was drafted, income that was NOT foreign base company income or insurance income, but otherwise would be GILTI and subject to pass-through tax, could NOT use the high tax kickout to avoid tax. I noted that this appeared to me to be a statutory glitch and was inconsistent with the policy of allowing a high tax kickout and the overall purpose of the GILTI provisions.

Others have brought this issue to the attention of Treasury in regard to comments to the GILTI proposed regulations. The bad news is that while Treasury did take those comments under consideration, in enacting final regulations it declined to extend the high tax kickout to income other than foreign base company income and insurance income under Subpart F. See Treasury Decision 9866 (6/19/2019).

The good news is that Treasury also released a proposed regulation that allows a CFC to make an election to have gross income items qualify for exclusion from GILTI if such income is subject to foreign income taxes at an effective rate that is greater than 90% of the §11 maximum tax rate. Prop. Treas. Regs.§1.951A-2(c)(6). While not entirely clear from the language of the proposed regulation (at least to me), the Preamble to the proposed regulation confirms this intent:

For the foregoing reasons, the proposed regulations provide that an election may be made for a CFC to exclude under section 954(b)(4), and thus to exclude from gross tested income, gross income subject to foreign income tax at an effective rate that is greater than 90 percent of the rate that would apply if the income were subject to the maximum rate of tax specified in section 11 (18.9 percent based on the current rate of 21 percent). See proposed §1.951A-2(c)(6)(i). . .If an election is made with respect to a CFC, the election applies to exclude from gross tested income all the CFC's items of income for the taxable year that meet the effective rate test in proposed § 1.951A-2(c)(6)(iii). Preamble to Prop Regs., Fed. Reg. Vol. 84, No. 120 at p. 29114 [REG-101828-19]. 

Back to some bad news. The proposed regulations “are proposed to apply to taxable years of foreign corporations beginning on or after the date that final regulations are published in the Federal Register, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end.” Preamble to Prop Regs. If there is any doubt as to not being able to use the proposed regulations before they are finalized, the Preamble to the final and temporary regulations provides: “until the regulations described in the separate notice of proposed rulemaking are effective, a taxpayer may not exclude any item of income from gross tested income under section 951A(c)(2)(A)(i)(III) unless the income would be FBCI or insurance income but for the application of section 954(b)(4) and § 1.954-1(d).