Menu
Tax Notes logo

ABA Members Look for Guidance on More COVID-19 Tax Issues

MAY 12, 2020

ABA Members Look for Guidance on More COVID-19 Tax Issues

DATED MAY 12, 2020
DOCUMENT ATTRIBUTES

May 12, 2020

Hon. Charles P. Rettig
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Tax Implementation of the CARES Act

Dear Commissioner Rettig:

Enclosed please find recommendations regarding the implementation of various tax related provisions of the CARES Act. These comments are submitted on behalf of the Section of Taxation and have not been approved by the House of Delegates or the Board of Governors of the American Bar Association. Accordingly, they should not be construed as representing the position of the American Bar Association.

The Section of Taxation would be pleased to discuss these comments with you or your staff.

Sincerely,

Tom Callahan
Chair, Section of Taxation
American Bar Association
Washington, DC

Enclosure

cc:
Hon. David Kautter, Assistant Secretary (Tax Policy), Department of the Treasury
Krishna P. Vallabhaneni, Tax Legislative Counsel, Department of the Treasury
Jeffrey Van Hove, Senior Advisor, Office of Tax Policy, Department of the Treasury
Hon. Michael J. Desmond, Chief Counsel, Internal Revenue Service
Sunita Lough, Deputy Commissioner, Services and Enforcement, Internal Revenue Service


AMERICAN BAR ASSOCIATION
SECTION OF TAXATION

COMMENTS ON TAX IMPLEMENTATION
OF THE CARES ACT

These comments (“Comments”) are submitted on behalf of the American Bar Association Section of Taxation (the “Section”) and have not been approved by the House of Delegates or Board of Governors of the American Bar Association. Accordingly, they should not be construed as representing the position of the American Bar Association.

Principal responsibility for preparing these Comments was exercised by Ellen P. Aprill. The following individuals provided substantial assistance in drafting these Comments: Leslie Book, Sheri Dillon, Rosemary Fei, Keith Fogg, Kurt Lawson, Edward Leyden, Sarah Lora, Eileen Marshall, Allie Petrova, Alexander Reid, Nancy Rossner, Lawrence Sannicandro, Christine Speidel, Mary I. Slonina, Martha Steinmann, Carolyn Ward, Kenneth C. Weil, Susan Wetzel, and Adriana Lofaro Wirtz. These Comments were reviewed by Lisa Zarlenga of the Section's Committee on Government Submissions and by Eric Sloan, the Section's Vice Chair of Government Relations.

Although members of the Section may have clients who might be affected by the federal tax principles addressed by these Comments, no member who has been engaged by a client (or who is a member of a firm or other organization that has been engaged by a client) to make a government submission with respect to, or otherwise to influence the development or outcome of one or more specific issues addressed by, these Comments has participated in the preparation of the portion (or portions) of these Comments addressing those issues. Additionally, while the Section's diverse membership includes government officials, no such official was involved in any part of the drafting or review of these Comments.

Contacts: Ellen P. Aprill
213-247-3488
Ellen.Aprill@LLS.edu

Date: May 12, 2020

Introduction

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act,1 which includes a number of tax provisions, became law. To aid the Department of Treasury (“Treasury”) and the Internal Revenue Service (the “Service”) in issuing guidance for the tax aspects of the CARES Act, the Section offers recommendations on the following CARES Act provisions: forgivable loans for small businesses under the Paycheck Protection Program (“PPP”), economic impact payments (“EIP”), special rules regarding retirement plans, changes to charitable contribution rules, the employee retention credit (“ERC”), deferral of employer social security taxes, and qualified improvement property (“QIP”). We discuss these recommendations in the order that the provisions to which they relate appear in the CARES Act.

We commend Treasury and the Service for the considerable effort in providing extraordinarily prompt guidance for the recent COVID-19 related tax legislation and offer these Comments to highlight areas in which further guidance would be helpful. These Comments supplement the preliminary comments on the COVID-19 emergency submitted by the Section on April 3, 20202 and the comments on specific substantive and procedural provisions impacted by the COVID-19 emergency submitted by the Section on April 29, 2020.3 However, the recommendations contained in these Comments are not comprehensive; we may submit additional recommendations in the future. In addition, the Section is hosting a series of webinars on topics relating to the CARES Act, the Families First Coronavirus Response Act, and COVID-19-related guidance during which we will highlight additional areas where guidance would be helpful.

I. PAYROLL PROTECTION PROGRAM (SECTION 1102 OF CARES ACT)

A. Background

The PPP authorizes lenders to make loans to qualifying businesses through the Small Business Administration (the “SBA”) during the COVID-19 crisis. Eligible businesses include sole proprietorships, independent contractors, self-employed individuals, and certain nonprofits with, in most cases, 500 or fewer employees. The interest rate on the loans was set by the SBA at one percent.4 The loans can be used to fund payroll costs, and most mortgage interest, rent, and utility costs over the eight-week period after the loan is made if employee and compensation levels are maintained. Payroll costs are capped at $100,000 on an annualized basis for each employee.

If certain conditions are met regarding use of the loan, the loan will be forgiven. Section 1106 of the CARES Act5 provides that “any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness . . . shall be excluded from gross income.” The Service issued Notice 2020-32,6 which sets forth the Service's view that expenses paid with the proceeds of a forgiven loan are not deductible under either section 265 or the reimbursement doctrine.7

In addition, if a PPP loan is forgiven, the taxpayer does not qualify for deferral of payroll taxes under section 2302 of the CARES Act. Specifically, section 2302(a)(3) of the CARES Act provides that section 2302 will not apply if the taxpayer “has had indebtedness forgiven under section 1106 of the CARES Act.” We appreciate the FAQs the Service has issued to clarify the interaction between the PPP loan forgiveness and deferral of employment taxes.8 However, as discussed below, additional guidance would be helpful.

B. Recommendations

1. Additional Guidance Regarding the Loan Forgiveness. The CARES Act provides that the amount of loan forgiven is excluded from gross income, but the provision does not mention section 108. It would be helpful to clarify that section 108 is not applicable, and thus, the taxpayer's attributes remain intact upon forgiveness of a PPP loan (i.e., because section 108 is not applicable, the attribute reduction rules of section 108(b) are inapplicable).

2. Guidance on Reporting PPP Loans on Form 990. Organizations filing Form 990 (Return of Organizations Exempt from Income Tax) would benefit from guidance on proper reporting of the loans upon receipt, repayment, and forgiveness, as well as proper characterization of the loans for purposes of the public support test.

II. ECONOMIC IMPACT PAYMENT (SECTION 2201 OF CARES ACT)

A. Background

Section 2201 of the CARES Act allows a credit against tax for taxable year 2020 that will be issued to eligible individuals in the form of an advanced refund or EIP. The amount and eligibility for this refund will be based on a taxpayer's 2019 tax return. If, however, a tax return has not been filed for taxable year 2019, the Secretary may base the issuance of a refund on a taxpayer's 2018 tax return, and, if a 2018 tax return has not been filed, then the Secretary may utilize information in the 2019 Form SSA-1099 (Social Security Benefits Statement) or 2019 Form RRB-1099 (Social Security Equivalent Benefits Statement).

The Section submitted a letter on April 13, 2020 with respect to the delivery mechanisms of the EIP authorized under the CARES Act to low-income and vulnerable individuals.9 We appreciate the collaboration between the Service and other federal agencies to allow for automatic payments to recipients of Supplemental Security Income and Veterans Affairs benefits.10 We offer some additional comments below regarding how the EIP will reach individuals with complicated family situations. The legislation contemplates one combined EIP for couples who have filed together, which can lead to complicated and/or inequitable results for those experiencing abuse or an acrimonious divorce. Ensuring the payment for qualified children reaches the appropriate guardian or caregiver may also be a challenge.

B. Recommendations

1. Offset for Past-Due Child Support Payments. The Service noted in an FAQ that it will automatically apply injured spouse11 relief requested on tax returns to the EIP.12 However, the Service recently acknowledged that this is not occurring in every case.13 We applaud the Service for working with other agencies to resolve the issue, and we urge the Service to ensure that all injured spouse taxpayers receive the appropriate EIP.

2. Married Non-filing Individuals Who Do Not Wish to File Jointly. It is not unusual for separated spouses to remain legally married for financial, religious, or logistical reasons. In some cases, such spouses have not lived together for years and are not in contact with one another. Current instructions for EIP-only returns on the non-filer portal indicate that the filing status must be Single or Married Filing Jointly.14 We recommend that the Service provide a mechanism for married non-filers to claim the EIP without their spouse's participation.

3. Victims of Domestic Violence Filing Joint Returns. We recommend the Service take the following steps to ensure both spouses receive the EIP to protect individuals experiencing domestic violence:

a. Provide specific guidance to taxpayers regarding the deadline and process for filing a superseding15 federal income tax return for tax year 2019. Taxpayers who discover that an abusive spouse has already filed an unauthorized joint return are commonly counseled to file their own separate return, ideally before the extended filing deadline. These returns must be filed by mail because it is not possible to file a return electronically when the social security number of the taxpayer or spouse has been included on a processed return. In this time period when paper returns are not being processed, we recommend the Service devise a system for affected taxpayers to send their superseding returns to a special unit, electronically or by fax, to be processed as a superseding return. We also recommend the Service include easy-to-understand instructions for these returns on the Service's website.

b. Search for pending spousal relief claims or a victim of domestic violence indicator on taxpayer accounts and take steps to ascertain the proper address and/or banking information for the taxpayer prior to issuing an EIP to the couple jointly. Such a search would ensure both individuals will receive an EIP.

c. In cases in which spouses are required to file a married filing jointly return by a divorce decree, they frequently also file a Form 8888 (Allocation of Refund) to split the refund between two bank accounts. The Service has said that it will not follow the Form 8888 allocation for EIP funds.16 This means that a spouse in an abusive relationship with account information listed second on the return would be required to go to court to demand receipt of the EIP from the abusive ex-spouse in order to gain access to the EIP they may badly need. We recommend the Service honor Form 8888 and split the EIP between the bank accounts listed for married filing jointly returns.

4. Receipt of Additional $500 per Qualifying Child. We recommend the Service:

a. Provide a safeguard for custodial parents who have signed Form 8332 (Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent) permitting the non-custodial parent to claim an exemption for the child for 2019. The custodial parent, being the parent with whom the child spends the majority of their time, is likely the parent in greater need of the $500 per child.

b. Issue specific guidance for divorced and separated parents regarding the EIP for children who are shared between custodial and non-custodial spouses. This is particularly important for parents whose entitlement to the dependency exemption changes from year to year under a divorce or separation agreement. For example, it would be helpful for the Service to confirm that a parent who properly claims a qualifying child (“QC”) on their 2020 tax return is entitled to a recovery rebate for this child, even if an EIP for the child was paid to the other parent based on the parents' 2019 tax returns. We believe this result is consistent with the following change to the Code made by the CARES Act:

i. Section 6428(a) provides for a “recovery rebate” 2020 income tax credit to eligible individuals, including $500 for each QC within the meaning of section 24(c).

ii. Section 6428(f) provides for advance refunds, known as the EIP. Under section 6428(f)(1), an EIP may be paid based on 2019 tax return information.

iii. Section 6428(e) provides for coordination between the 2020 recovery rebate and the EIP. Under this provision, a taxpayer's recovery rebate is reduced by half the EIP made with respect to a joint return, and it is also reduced (but not below zero) by any EIP made “to the taxpayer.” It therefore appears that a taxpayer's recovery rebate would not be reduced by an EIP paid to another taxpayer for a QC.

c. Allow those who have automatically received an EIP through a federal public benefit to request the additional funds for a QC as a supplemental payment through the non-filer portal. On April 20, 2020, the Service issued a news release notifying the public that Social Security retirement and disability income recipients and Railroad Retirement Benefits recipients would need to request the additional $500 for each QC by noon on April 22, 2020.17 On April 24, the Service issued a similar news release for SSI and VA benefits recipients, with a deadline of May 5.18 These short timeframes did not provide sufficient time to reach all impacted individuals and assist them in completing the non-filer portal. Although social security income (“SSI”) recipients had until May 5, 2020 to add QCs, the extra two weeks will similarly provide insufficient time to reach many SSI recipients. We recommend the Service continue to allow those who received their individual EIP through a federal benefit program to utilize the non-filer portal to enter information about their QCs and then issue supplemental payments to those individuals. The statute requires EIPs to be paid out by December 31, 2020.19 Although the time constraint poses practical and resource challenges, we are not aware of any legal barrier to the Service sending a taxpayer's EIP in multiple payments.

d. Ensure that individuals with income below the minimum for a refundable child tax credit receive the EIP for their QCs. Anecdotally, taxpayers with income under $2,500 for 2019 who have used the nonfiler tool for themselves and their QCs are receiving only EIP for themselves; they do not appear to be receiving any EIP for their QCs.20

5. Social Security Numbers. Generally, taxpayers and their QCs must have social security numbers valid for employment in the United States in order to receive an EIP. However, the legislation contains special rules, for example, for families with military members. Taxpayers and their assisters could benefit from guidance for immigrants and mixed-status families.

6. Non-filer Portal. We appreciate the Service's rapid creation of the non-filer portal to accommodate those who wish to claim the EIP but do not have a filing requirement. However, other taxpayers may use this portal when either: (i) they are required to file a standard 2019 tax return or (ii) they would benefit from a refund if they instead filed a standard 2019 tax return. The non-filer portal creates a Form 1040 like a regular tax return21 and e-files the return, therefore prohibiting that taxpayer from later e-filing a complete 2019 tax return. Because the Service does not have the capacity to process paper-filed returns at this time and will likely be experiencing a back log of returns to process for months, taxpayers who use the non-filer portal will have to wait indefinitely to have a paper return processed. We recommend that the Service:

a. Change the system to allow for individuals to complete and submit their information through the non-filer portal and subsequently e-file a complete 2019 tax return. This would help taxpayers due a refund for 2019, as well as those taxpayers who have a filing requirement and payment due resulting from self-employment income, which is conducive to the Service's enforcement goals. The portal currently lists $12,200 as the filing threshold, when the self-employment threshold is actually $400, so these taxpayers may not realize that they have a filing requirement even if they read the instructions on the portal carefully.

b. Provide clearer messaging and instructions to individuals about whether to use the portal. This messaging should (i) warn taxpayers that they can either use the portal, or e-file a 2019 return, but not both and (ii) more clearly deter individuals from using the non-filer portal where those persons would benefit from filing a full return. In this regard, we also recommend adding a decision tree or eligibility questionnaire to help taxpayers determine if they would benefit from filing a full 2019 tax return in lieu of using the portal.

c. If our recommendation in (a) above cannot be accomplished quickly or at all, we recommend the Service create a mechanism for taxpayers or their representatives to e-file or fax a complete 2019 tax return after to the completion of the non-filer application so that taxpayers who mistakenly use the non-filer portal not realizing it populates on a 2019 Form 1040, or not realizing they needed or wanted to file a 2019 return, can file a correct 2019 return in a way that the Service can currently process.

III. SPECIAL RULES RE USE OF RETIREMENT PLANS (SECTION 2202 OF CARES ACT)

A. Background

Section 2202 of the CARES Act permits penalty-free distributions from retirement plans of up to $100,000 for COVID-19–related expenses, increases the limitations for plan loans in certain cases, and waives the 2020 required minimum distributions. On May 4, the Service issued a set of helpful FAQs on section 2202 of the CARES Act,22 which include a statement that Treasury and the Service intend to issue guidance similar to that provided in Notice 2005-92,23 which was issued in connection with the Katrina Emergency Tax Relief Act of 2005 (“KETRA”).24

B. Recommendation

While we appreciate the statement in the May 4 FAQs that it is optional for employers to adopt the distribution and loan rules of section 2202 of the CARES Act, we nonetheless recommend that in forthcoming guidance, Treasury and the Service include a statement like the one in Notice 2005-9225 that “[a]n employer is permitted to choose whether to treat distributions under its plans as Katrina distributions.” We also recommend that in forthcoming guidance, Treasury and the Service confirm that employers that have adopted the distribution and loan rules of section 2202 of the CARES under the mistaken impression that those rules were mandatory (or, if not mandatory, had to be adopted immediately to be effective) be permitted to rescind the adoption of those rules.

IV. ALLOWANCE OF PARTIAL ABOVE-THE-LINE DEDUCTION FOR CHARITABLE CONTRIBUTIONS (SECTION 2204 OF CARES ACT)

A. Background

Section 2204 of the CARES Act provides an above-the-line deduction of up to $300 for cash contributions to public charities other than donor-advised funds by “an eligible individual,” which is defined as “any individual who does not elect to itemize deductions.” The deduction is effective for taxable years beginning after December 31, 2019.

B. Recommendation

Questions have arisen as to the interpretation of the statutory language under sections 62(a)(22) and 62(f) — specifically, whether the $300 limit applies per tax form filed or per individual. Are married individuals filing joint returns using the standard deduction able to take an above-the-line charitable contribution deduction of up to $600 or only up to $300? The Joint Committee on Taxation interprets the provision to mean a $300 limit for married individuals filing joint returns.26 We recommend that the Service provide guidance on this issue to prevent possible confusion.

V. EMPLOYEE RETENTION CREDIT (SECTION 2301 of CARES ACT)

A. Background

The ERC is a fully refundable tax credit for employers (including tax-exempt employers) equal to 50 percent of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees. To be eligible, an employer must have been carrying on a trade or business in 2020 and either have the operation of such trade or business fully or partially suspended during the calendar quarter due to orders from governmental authorities imposing limits related to COVID-19 or have experienced a significant decline in gross receipts during the calendar quarter.27

This credit applies to wages paid after March 12, 2020, and before January 1, 2021. If the eligible employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to either such a suspension of operations or significant decline in gross receipts. If the eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages include all wages paid to employees during any period of such a suspension or decline in gross receipts. The maximum credit for qualified wages to any employee is $5,000.

Many employers will not know for several months whether they have experienced a significant decline in gross receipts, which is measured by comparing receipts in a calendar quarter in 2020 to the same calendar quarter in 2019. Accordingly, at the present time, employers have been focused on eligibility for the credit based on a partial suspension of operations due to a COVID-19–related governmental order.

We appreciate that the Service has issued a set of FAQs related to this credit.28 We note that, in the FAQs as published on April 29, 2020, the Service took the position that an employer that does not pay wages to an employee that is not providing services, such as where an employee has been laid off, but continues to provide full health benefits, would not be able to treat the health benefits as qualified wages for purposes of the credit. After Secretary of the Treasury Mnuchin received a letter from Senator Grassley, Senator Wyden, and Representative Neal regarding this decision,29 the FAQs have been revised and treat payment of health benefits as wages.30

Additional guidance, particularly in regard to partial suspensions, would be helpful. The Service's recently issued FAQs on this topic provide several examples of partial suspensions of operations due to a governmental order relating to COVID-19. Although the examples are helpful, many types of situations are not addressed by the FAQs. Employers whose operations do not fall within the scope of the examples thus face uncertainty.

B. Recommendations

1. Guidance on Comparability to Prior Operations in Connection with Partial Suspension. FAQ 33 provides that, if an employer's workplace is closed by a governmental order but the employer is able to continue operations comparable to its operations prior to the closure by requiring employees to telework, the employer's operations are not considered to have been fully or partially suspended as a consequence of a governmental order. The FAQ provides the example of a software development company that ordered mandatory telework for all employees and limited client meetings to telephone or video conferences when a governmental order required the company to close its office. In the example, prior to the issuance of the governmental order, all employees at the company had teleworked once or twice per week, and business meetings were held at various locations. The example does not make clear the degree to which the employer's operations must be comparable to its operations prior to the closure to fall within the scope of the Service's guidance. For example, would the Service have reached a different conclusion if some employees of the software company were not teleworking prior to the governmental order? Further, it would be helpful to know whether the Service accepts the view in the JCT Report that an accounting firm's operations are treated as partially suspended when it closes its office under a directive from public health authorities to cease all activities other than minimum basic operations and does not require any services from employees who cannot work from home (e.g., custodial employees, mail room employees).31 Taxpayers would benefit from additional examples illustrating the salient facts relevant to the determination of comparability to prior operations.

2. Guidance on the Impact of Recommendations from Federal Agencies on Partial Suspension. FAQ 30 provides that an employer that operates an essential business is not considered to have been fully or partially suspended if the governmental order allows the employer to remain open, even though the order requiring non-essential businesses to close may have an effect on the employer's operations. FAQ 31 recognizes, however, that an essential business may be fully or partially suspended as a result of the inability to obtain critical goods or materials from their suppliers that were required to suspend operations as a result of a governmental order. On the other hand, in FAQ 32, the Service makes clear that it does not consider the fact that a governmental order causes customers of an essential business to stay at home to be sufficient for a business to qualify as having a full or partial suspension of operations for purposes of the credit.

FAQ 28 provides that orders from a governmental authority include orders, proclamations, or decrees from the federal government, or any state or local government. However, FAQ 29 states that a suspension of operations that is voluntary on the part of the employer is not an order from a governmental authority.

In many cases, governmental orders permitting essential businesses to remain open nevertheless subject the essential businesses to restrictions, including orders that limit capacity or otherwise impose social distancing constraints.32 Further, many essential businesses that remain open believe they are obligated to comply with recommendations from federal agencies, including the Center for Disease Control and Prevention (CDC) and guidance from the Department of Homeland Security (DHS), even if the applicable governmental order allowing them to remain open does not itself explicitly mandate such compliance. These employers may take steps consistent with CDC and DHS guidelines to protect their employees. They do so out of concern for their employees' health and to mitigate the risk of future liabilities, such as increased healthcare expenses and legal liabilities. For example, many laboratories that are essential businesses have reduced the number of scientists and other employees in the laboratory at any given time in order to enable their employees to work safely. Some grocery stores have taken similar measures. We recommend additional guidance on whether an essential business that remains open would be considered partially suspended because of restrictions due to COVID-19, whether imposed by a governmental order or voluntarily adopted by an employer to comply with CDC and DHS guidelines.

VI. Deferral of Employer Social Security Taxes (Section 2302 of CARES Act)

A. Background

Section 2302 of the CARES Act provides for deferral of the employer's share of social security taxes for the period from March 27, 2020 to December 31, 2020 without penalty or interest. Employers must pay 50 percent of the deferred amount by December 31, 2021 and the remainder of the deferred amount by December 31, 2022.

Section 2302(a)(3) of the CARES Act provides that section 2302 will not apply if the taxpayer “has had indebtedness forgiven under section 1106 of the CARES Act.” The Service's FAQs clarify that an employer who has received a PPP loan may still defer Social Security taxes until it receives a decision from its lender that its PPP loan is forgiven. In addition, the amount that was deferred through the date that the PPP loan is forgiven may continue to be deferred.33

B. Recommendation

Because of administrative difficulties or the uncertainty surrounding the interaction of the CARES Act's PPP loan provisions and the social security tax deferral provision, certain employers did not utilize the deferral despite their eligibility. We recommend that guidance be issued providing that an employer may apply social security taxes that were paid after March 27, 2020, but that could have been deferred under section 2302, to other employment taxes owed for the remainder of 2020 without incurring a failure-to-deposit penalty.

VII. QUALIFIED IMPROVEMENT PROPERTY (SECTION 2307 of CARES ACT)

A. Background

Section 2307 of the CARES Act corrects a technical error in the 2017 Act.34 Under this provision of the CARES Act, QIP placed in service in 2018 and after is now 15-year property and eligible for 100 percent bonus depreciation under section 168(k).

B. Recommendations

1. Filing Procedures for QIP. We recommend permitting taxpayers to file accounting method changes related to QIP under Designated Change Number (“DCN”) 7 through December 31, 2020. Alternatively, we recommend the Service not challenge QIP changes filed under DCN 7 before the date of publication of Revenue Procedure 2020-2535 or a date shortly after publication, as many taxpayers have already completed changes for QIP on DCN 7 and identifying and modifying these changes would create a significant administrative burden.

2. 39 Years as a Permissible Recovery Period for Certain QIP. We recommend permitting passthrough entities that have not filed their 2019 tax returns but have provided Schedules K-1 to their owners to continue to depreciate QIP over a period of 39 years (40 years if subject to alternative depreciation system (“ADS”)) without bonus depreciation for purposes of their 2019 tax return filings and allow such entities to correct the treatment of QIP in a subsequent year by applying the procedures of Revenue Procedure 2020-25. Further, we respectfully request that the Service provide guidance and authority for practitioners to sign such passthrough entity returns even if QIP is being depreciated over a period of 39 years (40 years if subject to ADS) without bonus depreciation, despite the statutory change, because of the administrative burden of re-issuing Schedules K-1 to all partners.

3. Clarify the Impact of “Made by the Taxpayer” Language. Under the PATH Act,36 which is applicable to QIP placed in service in 2016 and 2017 generally, the definition of QIP did not contain any reference to a requirement that the improvements be “made by the taxpayer.” Similarly, the 2017 Act provisions defining QIP, applicable to QIP placed in service in 2018 and future periods, did not contain any reference to a requirement that the improvements be “made by the taxpayer.” The CARES Act aligned the effective date of its QIP provisions to the effective date of the QIP provisions in the 2017 Act, but also added the requirement that the improvements be “made by the taxpayer” in order to be considered QIP effective for assets placed in service in 2018 and future periods. We suggest that the Service consider adding the “made by the taxpayer” language specifically to Treas. Reg.§ 1.168(b)-1(a)(5)(i)(A). Similarly, we recommend that Treasury and the Service make clear the impact of the requirement that QIP must be “made by the taxpayer” on bonus depreciation (e.g. whether bonus depreciation is permitted for used property). In addition, examples showing how the “made by the taxpayer” requirement may operate in practice would be helpful. Finally, we request clarification of the terms “enlargement of a building” and “internal structural framework,” through examples or otherwise, so the definitions in presently effective guidance are more complete.

4. Additional Procedures to Revoke Prior Year Elections. We recommend that the Service expand on Revenue Procedure 2020-2237 for revoking electing real property trade or business elections or farming business elections under section 163(j)(7) to allow revocation in ways similar to that provided in Revenue Procedure 2019-33,38 which allows revocation of certain bonus depreciation elections by filing accounting method change requests or amended tax returns, for any or all years affected by the CARES Act net operating loss carryback provision. In addition, we recommend permitting taxpayers to include in the net section 481(a) adjustment all amounts necessary to reflect the cumulative effect of revoking any election as a real estate property trade or business, or farming business election, including the application of section 163(j). We also recommend allowing partnerships and S corporations to implement the change in method of accounting to revoke the real property trade or business election or farming business election using procedures that provide for the application of section 163(j) on a cut-off basis at the partner or S corporation shareholder level, which would allow the partners or shareholders to apply the revocation on a going-forward basis without the need to claim a section 481(a) adjustment or adjust prior returns. Further, we recommend permitting taxpayers additional time to file an amended federal return to revoke the real estate trade or business or farming business election, including allowing such taxpayers to file superseded Forms 1065 (U.S. Return of Partnership Income) or 1120S (U.S. Income Tax Return for an S Corporation), regardless of whether the entity requested an extension.

FOOTNOTES

1Pub. Law No. 116-136.

2See ABA Tax Section, Preliminary Comments on the Impact on Taxpayers of the COVID-19 Emergency (2020), available at https://www.americanbar.org/content/dam/aba/administrative/taxation/policy/2020/040320comments.pdf.

3See ABA Tax Section, Specific Substantive and Procedural Provisions Impacted by the COVID-19 Emergency (2020), available at https://www.americanbar.org/content/dam/aba/administrative/taxation/policy/2020/042920comments.pdf.

4SBA, Paycheck Protection Plan (PPP) Information Sheet: Borrowers, available at https://home.treasury.gov/system/files/136/PPP--Fact-Sheet.pdf.

5When referring to a section of the CARES Act, these Comments will so specify. When the CARES Act is not specified, all “section” references are to the Internal Revenue Code of 1986, as amended (the “Code”), and all “Treas. Reg. §” references are to the Treasury regulations promulgated (or proposed) under the Code, in each case as in effect as of the date of these Comments.

6Notice 2020-32, 2020-21 I.R.B. 1 (May 18, 2020), available at https://www.irs.gov/pub/irs-drop/n-20-32.pdf.

7Senator Charles Grassley, Chairman of the Senate Finance Committee, Senator Ron Wyden, Ranking Member of the Senate Finance Committee, and Representative Richard Neal, Chairman of the House Ways and Means Committee, sent Treasury Secretary Mnuchin a letter on May 5, 2020 urging Treasury and the Service to reconsider this position and permit deductions. See May 5 Letter to the Honorable Steven T. Mnuchin, available at https://www.finance.senate.gov/imo/media/doc/2020-05-05%20CEG,%20RW,%20RN%20to%20Treasury%20(PPP%20Business%20Deductions).pdf. In its May 7 response to this letter, Treasury stated that it appreciated and would consider the concerns expressed. May 7 Letter of Frederick W. Vaughan, Principal Deputy Assistant Secretary, Office of Legislative Affairs to the Honorable Charles Grassley, available at https://www.finance.senate.gov/imo/media/doc/2020-05-07%20UST%20Response%20to%20Grassley%2005-05%20letter.pdf.

8Deferral of employment tax deposits and payments through December 31, 2020, available at https://www.irs.gov/newsroom/deferral-of-employment-tax-deposits-and-payments-through-december-31-2020. To the extent substantive guidance is provided in the form of FAQs, we encourage Treasury and the Service to publish the FAQs in the Internal Revenue Bulletin as other administrative pronouncements which can be relied on by taxpayers as substantial authority.

9ABA Tax Section, Initial Recommendations on Delivering Economic Impact Payments to Low-Income Individuals (2019), available at: https://www.americanbar.org/content/dam/aba/administrative/taxation/policy/2020/041320comments.pdf.

10IR-2020-73 (Apr. 15, 2020); IR-2020-75 (Apr. 17, 2020).

11An injured spouse is a taxpayer who files a joint tax return and all or part of that taxpayer's portion of the overpayment was, or is expected to be, applied (offset) to his/her spouse's legally enforceable past-due federal tax, state income tax, state unemployment compensation debts, child support, or a federal nontax debt, such as a student loan. Instructions available at https://www.irs.gov/pub/irs-pdf/i8379.pdf.

12IRS Economic Impact Payment Information Center, Question 21, available at https://www.irs.gov/coronavirus/economic-impact-payment-information-center (last visited May 12, 2020).

13IRS Economic Impact Payment Information Center, Question 31, https://www.irs.gov/coronavirus/economic-impact-payment-information-center (last updated May 8, 2020). This issue is clearly having an impact on many taxpayers as noted in the many anecdotal accounts submitted as comments on the Procedurally Taxing blog post Injured Spouse and Economic Impact Payments, https://procedurallytaxing.com/injured-spouse-and-economic-impact-paymentsSee Procedurally Taxing blog, available at https://procedurallytaxing.com/injured-spouse-and-economic-impact-payments/.

14See Non-Filers: Enter Payment Info Here, available at https://www.irs.gov/coronavirus/non-filers-enter-payment-info-here; see also TaxSlayer VITA/TCE blog (Apr. 8, 2020), available at https://vitablog.taxslayerpro.com/2020/04/08/coming-soon-returns-specific-for-economic-impact-payments/.

15A subsequent return that is filed before the unextended due date for the applicable tax year is a superseding return, which takes the place of the originally filed (“original”) return. See I.R.M. 21.6.7.4.10 (07-22-2019); Haggar Co. v. Helvering, 308 U.S. 389 (1940). By filing a superseding return, a victim of domestic violence can assure themselves of separate filing status. In contrast, if the requirements for a superseding return are not met, the victim must prove that the original return was fraudulent, or else seek spousal relief from the Service. It is not ordinarily possible to change one's filing status from joint to separate after the filing deadline has passed. See Treas. Reg. § 1.6013-1(a)(1).

16“If you elected to split your refund between several accounts, you cannot use Get My Payment to designate which account to have your payment deposited in. We will deposit the payment to the first bank account that you listed on Form 8888, Allocation of Refund. If your direct deposit is rejected, your payment will be mailed to the address we have on file for you.” https://www.irs.gov/coronavirus/get-my-payment-frequently-asked-questions#elig.

17SSA and RRB recipients with eligible children needed to act by April 22 to quickly add money to their automatic Economic Impact Payment; IRS asks for help in the “Plus $500 Push,” available at https://www.irs.gov/newsroom/ssa-rrb-recipients-with-eligible-children-need-to-act-by-wednesday-to-quickly-add-money-to-their-automatic-economic-impact-payment-irs-asks-for-help-in-the-plus-500-push.

19Section 6428(f)(3)(A).

20A qualifying child for the EIP must satisfy the criteria in section 24(c); however, the minimum income provisions of section 24(d) do not apply to the EIP. See section 6428(a)(2).

21It is not clear whether the Service will treat the application submitted via the non-filer portal as valid tax return for all purposes. To constitute a valid return, a frequently cited test generally requires that the income tax return should be filed on the proper form, contain information sufficient to calculate a tax liability, identify the taxpayer, and must be signed and verified under penalties of perjury. Beard v Commissioner, 82 T.C. 766, 777 (1984), aff'd. 793 F.2d 139. (6th Cir. 1986). We recommend the Service clarify whether it considers the form produced by the non-filer portal to be a valid tax return.

22Coronavirus-related relief for retirement plans and IRAs questions and answers (May 4, 2020), available at https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers (updated May 4, 2020).

232005-2 C.B. 1165.

24Pub. Law No. 109-73, 119 Stat. 2016 (2005).

25See supra note 23.

26STAFF OF THE JOINT COMMITTEE ON TAXATION, JCX-12-20, DESCRIPTION OF THE TAX PROVISIONS OF PUBLIC LAW 116-136, T HE CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY (“CARES”) A CT, at 21, n. 76 (Apr. 22, 2020), available at https://www.jct.gov/publications.html?func=startdown&id=5254 (the “JCT Report”).

27An employer is considered to experience a significant decline in gross receipts during the period beginning the first quarter for which gross receipts are less than 50 percent of gross receipts for the same calendar quarter in the prior year, and ending with the calendar quarter for which gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in the prior year. Section 2301(c)(2)(B) of the CARES Act.

28FAQs: Employee Retention Credit under the CARES Act, available at https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act (May 8, 2020); COVID-19-Related Employee Retention Credits: Amount of Allocable Qualified Health Plan Expenses FAQs, available at https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-amount-of-allocable-qualified-health-plan-expenses-faqs (updated May 11, 2020).

29Chairman Grassley, Ranking Member Wyden, and Chairman Neal sent Treasury Secretary Mnuchin a letter on May 4, 2020 urging Treasury and the Service to reconsider this position. See May 4 Letter to the Honorable Steven T. Mnuchin, available at: https://www.grassley.senate.gov/sites/default/files/2020-05-04%20RW%2C%20CEG%2C%20RN%20to%20Treasury%20%28ERTC%20health%20benefits%29.pdf.

30COVID-19-Related Employee Retention Credits: Amount of Allocable Qualified Health Plan Expenses FAQs, supra note 28.

31JCT Report, supra note 26, at 38.

32See, e.g., N.J. Exec. Order No. 122 (Apr. 8, 2020), available at https://www.nj.gov/infobank/eo/056murphy/pdf/EO-122.pdf.

33Deferral of employment tax deposits and payments through December 31, 2020, available at https://www.irs.gov/newsroom/deferral-of-employment-tax-deposits-and-payments-through-december-31-2020.

34An Act to Provide for Reconciliation Pursuant to Titles II and I of the Concurrent Resolution on the Budget for Fiscal Year 2018, commonly referred to as the Tax Cuts and Jobs Act. Pub. Law No. 115-7, 131 Stat. 2054 (Dec. 22, 2017) (the “2017 Act”).

352020-19 I.R.B. 1 (May 4, 2020).

36Protecting Americans from Tax Hikes Act of 2015, Pub. Law No. 114-113, 129 Stat. 2242 (2015).

372020-18 I.R.B. 1 (Apr. 27, 2020).

382019-34 I.R.B. 662 (Aug. 19, 2019).

END FOOTNOTES

DOCUMENT ATTRIBUTES
Copy RID