New “No Rule” Areas

Every year the IRS publishes a list of areas where the IRS will not issue a private letter ruling. Items on the list can provide a warning to taxpayers that the IRS may not agree with the conclusion that would be sought in the ‘no rule’ area.

For 2020, the IRS added to the ‘no rule’ list or the ‘will not ordinarily be issued’ list:

1. Whether any portion of the items of income, deduction, and credit against tax of the trust will be included in computing under § 671 the taxable income, deductions and credits of grantors when distributions of income or corpus are made – (A) at the direction of a committee, with or without the participation of the grantor, and (1) a majority or unanimous agreement of the committee over trust distributions is not required, (2) the committee consists of fewer than two persons other than a grantor and a grantor's spouse; or (3) all of the committee members are not beneficiaries (or guardians of beneficiaries) to whom all or a portion of the income and principal can be distributed at the direction of the committee or (B) at the direction of, or with the consent of, an adverse party or parties, whether named or unnamed under the trust document (unless distributions are at the direction of a committee that is not described in paragraph (A) of this section).

2, Whether a trust which is not exempt from tax under § 501(a) is described in § 4947(a)(2) where a grantor, trustee, executor, administrator, donor, or beneficiary has represented that the trust has no amounts in trust for which a deduction was allowed under § 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, because no grantor, trust, estate, donor, or beneficiary has taken or plans to take any such deduction.

3. Whether a split-interest trust is described in § 4947(a)(2) because it has no amounts in trust for which a deduction was allowed under § 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522.

Rev.Proc. 2020-3

Private Foundations Gain a Small Tax Break on Investment Income

The SECURE Act stole all of the end of year thunder regarding changes in federal taxes. However, other changes were enacted. One of these was the repeal of Code Section 4940(e).

Code Section 4940 previously imposed a 2% excise tax on the investment income of private foundations. Section 4940(e) reduced that tax to 1% for foundations that increased their qualifying distributions over the average for the prior 5 years.

So as to simplify this small corner of the tax universe, this 2%/1% arrangement is now history. In its place the Taxpayer Certainty and Disaster Tax Relief Act of 2019 provides for a flat 1.39% rate.

NO REASONABLE CAUSE DEFENSE FOR FBAR FAILURE

Taxpayers who fail to file an FBAR to report a foreign account can escape penalty if they can show reasonable cause for the failure (if the failure to file was nonwillful). A recent district court case failed to allow for reasonable cause - click here for a condensed summary of the good and bad facts and the court’s conclusions. The case illustrates that the failure of a taxpayer to disclose the account on Schedule B of their Form 1040 is a big obstacle to a finding of reasonable cause.

U.S. v. AGRAWAL, 124 AFTR 2d 2019-6970 (DC WI 2019)