Although Congress did not pass any large tax bills in 2016, lawmakers did agree on a number of specific tax measures.
- In March, President Obama signed the Trade Facilitation and Trade Enforcement Act of 2015 (P.L. 114-125), which included an increase in the penalty for failure to file a return. The new law makes the increase in the penalty effective for returns required to be filed in calendar years after 2015.
- President Obama signed the Recovering Missing Children Act (P.L. 114-184) in June. The law amends Code Sec. 6103 to allow the IRS to share tax return information with federal, state and local law enforcement agencies to help with investigations involving missing or exploited children.
- President Obama signed the U.S. Appreciation for Olympians and Paralympians Act of 2016 (P.L. 114-239) in October. The legislation excludes from income the value of any Olympic or Paralym-pics medal, as well as prize money, for certain athletes.
- In December, President Obama signed the 21st Century Cures Act (P.L. 114255). The law allows certain small businesses to use qualified small business health reimbursement arrangements without running afoul of penalties for failing to satisfy market reforms under the Affordable Care Act (see discussion, below).
- Also in December, President Obama signed the Combat-Injured Veterans Tax Fairness Act (H.R. 5015). The law impacts combat-injured veterans who received severance payments on which tax was inappropriately withheld.
Congress did not take up before year-end the remaining extenders. Many relate to energy but a handful, including the higher education tuition and fees deduction, mortgage debt forgiveness tax relief, and private mortgage insurance deductibility, benefit individuals. These remaining extenders are likely to be part of tax reform legislation in 2017. Some could be made permanent; others could be eliminated.
Just as any cross-section of individual taxpayers represents a broad diversity of issues and concerns, notable developments during 2016 that impact the “individual” defy compart-mentalization into only a few categories. The following developments were particularly notable for their continuing impact on 2017.
Sharing Economy. In response to the growing sharing economy, the IRS created in 2016 new resources for taxpayers and has ramped up closer scrutiny of taxpayers who, intentionally or unintentionally, are paying less than they should. The IRS launched a Sharing Economy Tax Center on its website, highlighting tax issues for individuals and companies performing services in the sharing economy.
“This rapidly evolving area often presents new challenges for people engaged in these economic activities, whether they are renting a room or providing a ride,” IRS Commissioner John Koskinen said; “The IRS is working to help people in this area by providing them the information and resources they need to file accurate tax returns.” National Taxpayer Advocate Nina Olson said more than 40 percent of service providers in the sharing economy were unaware of possible estimated tax requirements.
Definition of Marriage. The IRS issued final regulations in September to explain that marriage for federal tax purposes encompasses both opposite-sex marriage and same-sex marriage. The final regulations generally track proposed regulations issued after the Supreme Court’s decision on same-sex marriage in Obergefell, 2015-1 ustc ¶50,357. The final regulations also clarify the treatment of common law and foreign marriages; they continue to exclude domestic partnerships and civil unions from the definition of marriage.
In Obergefell, the Supreme Court held that the Fourteenth Amendment requires a state to license a marriage between two people of the same sex. Further, states must recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out-of-state.
Mortgage Interest. The IRS announced in July its acquiescence in the Ninth Circuit Court of Appeals decision in Voss, 2015-2 ustc ¶50,427. The court held that the $1.1 million mortgage-interest deduction debt limits under Code Sec. 163 applied to unmarried co-owners on a per-taxpayer, not a per-residence, basis.
Despite the controversy surrounding this decision, it is unclear whether Congress will eventually overrule this outcome.
Form 1098-T, Tuition Statements. In July, the IRS issued proposed regulations that provide detailed guidance to higher education institutions on how to report tuition and other qualified expenses on Form 1098-T, Tuition Statement. The proposed regulations also provide a window of penalty relief for the institution’s failure to provide the student’s correct taxpayer identification number (TIN). In November, the IRS extended the penalty relief to 2017
60-Day Rollover Deadline. In August, the IRS unveiled a new self-certification procedure for taxpayers who inadvertently miss the 60-day time limit for certain retirement plan distribution rollovers. The IRS described a number of mitigating circumstances, including mistakes by a financial institution or rollover into an account that the taxpayer mistakenly thought was an eligible retirement plan. IR-2016-113, Rev. Proc. 2016-47.
The self-certification procedure provides relief without the time and expense of a private letter ruling request.
Partial Annuity Payouts. The IRS issued final regulations in September that allow qualified retirement plans to facilitate the payment of benefits partly in the form of an annuity and partly as a single sum or other accelerated form. The final regulations generally track proposed regulations issued in 2012 with certain simplifications and clarifications. TD 9783.
Estate Valuation Discounts. The IRS made changes to the estate tax valuation regime under Code Sec. 2704 in August. The proposed regulations attempt to address certain abuses connected to the valuation of interests with respect to corporations and partnerships for estate, gift and generation-skipping transfer tax purposes in conjunction with the treatment of lapsing rights and restrictions on liquidation when determining value in intra-family transfers. NPRM REG-163113-02.
Estate Consistent Basis Reporting. Code Sec. 6035 introduced reporting rules to assure that a beneficiary’s basis in certain property acquired from a decedent be consistent with the value of the property for estate tax purposes. Because many executors were unprepared for this requirement, first mandated by the Surface Transportation and Veterans Health Care Act of 2015 (P.L. 11441), the IRS extended the due date for filing initial Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, and distributing Schedule(s) A, first to February 29, then to March 31, and finally to June 30, 2016. Final regulations in December confirmed that no further extension beyond June 30, 2016, would apply to initial reporting and that the rule going forward generally requires reporting within 30-day of filing Form 706. TD 9797.
The business side of tax developments in 2016 was dominated by changes in rules and approach toward partnerships, corporations and LLCs, as well as a handful of other related developments. Notably, too, some taxpayers continued to struggle with complying with the so-called “repair regs” that now govern capitalization and expensing. In recognition, the IRS at year end again extended the deadline for making the requisite changes of accounting methods under an automatic consent procedure.
The use of partnerships as a business and investment entity of choice continued to expand in 2016. According to the IRS 2016 Fall SOI Bulletin, the latest annual statistics show that more than 3.6 million partnership returns and 27 million partner Schedules K-1 were filed.
Partnership Audits. The Bipartisan Budget Act of 2015 (P.L. 114-74) eliminated the so-called TEFRA unified partnership audit rules (as first introduced in the Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248)), along with the electing large partnership (ELP) rules, in favor of a more streamlined audit regime. Under a transition provision, the new audit regime will be required only in connection with returns filed for partnership tax years beginning after 2017. However, subject to certain exceptions, partnerships may choose to apply the new regime to any partnership tax year beginning after November 2, 2015.
Although partnerships as a whole did not like the old TEFRA audit regime, most effected partnerships are holding back on using the new opt-in procedure until more detailed guidance on the new rules is provided, either by Congress, Treasury or the IRS.
Leveraged Partnerships. Final and temporary regulations under Code Secs. 707 and 752 issued in October limit use of partnership leveraged transactions. By treating all partnership liabilities as nonrecourse liabilities solely for disguised sale purposes, the regulations render ineffective most structured leveraged partnership transactions built to eliminate the tax on distributions to partners that would follow contributions of appreciated property. The regulations similarly change the treatment of bottom dollar payment obligations.
Although final regulations are immediately effective, temporary regulations are not effective until January 3, 2017, creating some year-end planning opportunities.
Partners, Not Employees. The IRS issued final, temporary and proposed regulations in May intended to tighten, for employment tax purposes, the status of a partner as a partner and not an employee, despite a set up where the partner works for a disregarded entity (DE) owned by the partnership. A limited transition rule applies.
One of the key tax distinctions remaining between a partnership or LLC structure and an S Corporation structure is the ability in an S Corporation structure for an equity owner to also be treated as an employee of the S Corporation. As an alternative to the S Corporation route, some tax practitioners felt that a disregarded entity afforded a possible avenue to obtain employee treatment. These regulations prevent that strategy, at least for now.
Debt versus Equity. In October, the IRS issued final debt-equity Code Sec. 385 regulations. The regulations establish threshold documentation requirements that must be satisfied for certain related-party interests in a corporation to be treated as debt, and that treat as stock certain related-party instruments that otherwise would be treated as debt.
The regulations were issued both to a sigh of relief in toning down the reach of earlier proposed regulations and to a continuing concern over how the final regulations will be applied. They remain controversial in their broad potential for debt/equity reclassification.
Proposed regulations issued in April specifically targeted earnings stripping transactions (using interest deductions on U.S. debt to “strip” U.S.-source earnings to a lower-tax foreign jurisdiction). The final regulations ease concerns only somewhat over the scope of the proposed regulations, with potential application still too broad for some taxpayers not to capture some regular-course business activities.
These final regulations may get another look under the new Administration, especially with Republican tax reform proposals that would limit business interest deductions. Some taxpayers have also threatened judicial challenges.
Section 355 Spin Offs. In July, the IRS issued proposed regulations under Code Sec. 355 that tighten the requirements for corporations to spin off controlled corporations tax-free to their shareholders. Among other things, the regulations would impose new bright-line standards for triggering the device prohibition and for satisfying the active trade or business (ATB) test. The existing device test would also be tightened by adding a per se rule applied to the existence of nonbusiness assets.
In a sure sign that the IRS is planning more guidance in this area, the preamble to these regulations included a long list of issues on which the IRS is asking for comments.