Victim’s Attorneys’ Fees Are Deductible under Code § 162(q)

Code § 162(q), new under the Tax Cuts and Jobs Act, provides that:

(q) Payments related to sexual harassment and sexual abuse. No deduction shall be allowed under this chapter for—

(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or

(2) attorney’s fees related to such a settlement or payment.

The IRS has released some much needed guidance on interpreting Code § 162(q).  It is now clear that the attorneys’ fees of the victim remain deductible, regardless of whether there is a non-disclosure agreement as part of the settlement.

IRS guidance is still needed on whether 162(q) applies to a settlement with a non-disclosure agreement that settles multiple claims of employment discrimination or other employment-law claims, only one of which is related to sexual harassment or sexual abuse, and whether “related to” denies a deduction for the entire settlement, or whether the attorneys’ fees, and lack of deduction, is apportioned.

It is also unclear whether the IRS will consider payments made pursuant to a confidential agreement that does not settle sexual harassment claims but which contains a broad waiver of claims, including for sexual harassment, as “related to sexual harassment” and thus, preclude the deduction for attorneys’ fees.

2 Employment Discrimination Law and Litigation § 18.15.50

January 2019 update to Human Resources Guide § 5:57.70

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AICPA Seeks Confirmation that DSUE from Decedents Dying in 2018-2025 Remains Even After the Basic Exclusion Amount Decreases in 2026

On February 15, 2019, the American Institute of CPAs (AICPA) submitted comments on proposed estate and gift tax regulations regarding the increased basic exclusion amount enacted as part of the Tax Cuts and Jobs Act (TCJA).

AICPA seeks clarification that if the basic exclusion amount is lower in future years, either as a result of the 2026 expiration of the TJCA provision or other Congressional action, that the deceased spousal unused exclusion is equal to the amount filed on the Form 706 of the first spouse to die, rather than being based on the potentially lower basic exclusion amount when the second spouse dies.

AICPA Seeks Clarification on Estate and Gift Tax Exclusion Amount. Tax Notes Today. Feb. 20, 2019.

Convincing a Surviving Spouse to File an Estate Tax Return

The doubled estate and gift tax exemption, albeit temporary, resulting from the Tax Cuts and Jobs Act, has made it more difficult to convince surviving spouses with modest estates to file a Form 706 estate tax return to preserve the deceased spouse’s unused exemption (“DSUE”) amount.  Failure to file a Form 706 causes all of that remaining exemption to be forfeited.

If, as a practitioner, you are unable to convince a surviving spouse to file a Form 706, you’ll want to document your communications with the surviving spouse on this topic.  And, you’re not alone.  According to IRS data, only 681 NONtaxable returns were filed in 2017 claiming  DSUE amounts.

Curry, Jonathan. Getting Surviving Spouse to File Estate Return Now Even Harder. Taxnotes.com. Feb. 1, 2019.

Reconsideration of 199A (Again)

The IRS plans to finalize the pass-through regulations by the end of December. According to Holly Porter, Internal Revenue Service associate chief counsel, “There is a discussion around every single word” of the proposed regulations.

The proposed regulations issued in August would allow businesses to elect to aggregate their activities at the level of the business owner. Porter indicated that the IRS is thinking about allowing aggregation at the entity level.

The proposed regulations provided that “for businesses that earn at least $25 million in gross receipts and engage in minor activities that fit the specified service description, [there is ] a 5 percent threshold allowing the company to disregard that activity when calculating the deduction. For those making less than $25 million, the threshold rises to 10 percent.” Some practitioners describe this rule as punitive and would suggest, instead, “an allocation rule, which would allow businesses to base the deduction on how much income stems from eligible and ineligible activities.” Porter suggested that allocations wouldn’t provide much in the way of simplification.

I’ll be on the lookout for finalized regulations coming down the chimney with Santa Claus this holiday season.

O’Neal, Lydia and Allyson Versprille. IRS Reconsidering Parts of Pass-Through Write-Off Rules: Official. BNA Bloomberg. Tax Management Weekly Report. Pass-Through Entities. Nov. 19, 2018.

Where Oh Where is the Updated Form 706?

On October 25, 2018, the IRS has released Draft Form 706 and Draft Form 706 Instructions for decedents dying after December 31, 2017.  The draft forms reflect changes from the Tax Cuts and Jobs Act.

The Tax Cuts and Jobs Act increased the federal estate and gift tax unified credit basic exclusion amount and the federal GST exemption amount to $10 million (adjusted for inflation), effective for decedents dying and gifts made after 2017 and before 2026.

For decedents dying in 2018, the instructions reflect the following amounts: (1) the basic exclusion amount is $11,180,000; (2) the ceiling on special-use valuation is $1,140,000; (3) the amount used in figuring the 2% portion of estate tax payable in installments is $1,520,000; and (4) the basic credit amount is $4,417,800.

Bloomberg Tax. Tax Management Weekly Report. October 29, 2018 – Number 44.

Celebrity Deaths Highlight Pitfalls of Dying without Proper Estate Planning

Aretha Franklin died on August 16, 2018 without proper estate planning.  In 2018, as a result of the Tax Cuts and Jobs Act, there is a $11.18 million estate tax exemption per person.  It is not yet known whether Ms. Franklin’s estate exceeds this amount.  Even in the unlikely event that Ms. Franklin’s estate does not exceed the estate tax exemption amount, Ms. Franklin’s heirs will have to endure the estate administration and settlement process in full public view with all documentation part of the public record.  Proper planning could have provided for a more private administration for Ms. Franklin’s family.

Another music icon, Prince, passed away in 2016 without any estate planning in place.  His estate was worth about $200 million, with approximately $80 million paid out to the federal government in estate taxes.

But, it’s not just saving taxes and protecting privacy that make planning so important.  Clients are often misinformed about the process of intestate succession and who has (and who does not have) a right to take at the client’s death in the absence of any estate planning.

Versprille, Allyson. No Will or Trust?  Celebrities Risk Major Tax Fallout as a Result.  Tax Management Weekly Report. Bloomberg BNA. September 3, 2018.

OMB has Proposed 199A Regulations in Hand

On July 23, 2018, Treasury submitted the proposed 199A regulations to the Office of Information and Regulatory Affairs (“OIRA”), which is part of the Office of Management and Budget.
Pursuant to a Memorandum of Understanding between Treasury and OIRA, OIRA has ten (10) business days to review the proposed regulations, subject to extension if both parties agree.  If OIRA adheres to the ten (10) business day review period, then review would be concluded on Friday, August 3, 2018, and the proposed regulations could be released as early as Monday, August 6, 2018.
LISI 60-Second Planner: 199A Regulations Submitted for Review. Leimberg Information Services, Inc. (LISI). July 26, 2018.

Notice 2018-61: Estate and Non-Grantor Trust Expenses Not Subject to Miscellaneous Deduction Suspension

Notice 2018-61 informs us that the IRS will promulgate regulations regarding Code § 67(g), which was added to the Internal Revenue Code by the Tax Cuts and Jobs Act on December 22, 2017, and Code § 67(g)’s effect, if any, on the deductibility of certain expenses under Code § 67(b) and (e) incurred by estates and non-grantor trusts.

Code § 67(g) provides that no miscellaneous itemized deductions will be allowed for tax years 2018 through 2025. But, Notice 2018-61 provides that certain estate and non-grantor trust expenses will remain deductible and will not be subject to the miscellaneous itemized deductions suspension.

Pending regulations, estates and trust may rely on Notice 2018-61 for taxable years beginning January 1, 2018.

Under Code § 67(e), the adjusted gross income of an estate or trust is computed in the same manner as that of an individual, except that the following are treated as allowable in arriving at adjusted gross income:

  1. The deductions for costs that are paid or incurred in connection with the administration of the estate or trust that would not have been incurred if the property were not held in the estate or trust; and
  2. The deductions allowable under Code § 642(b) (personal exemption deduction for estates and trusts), Code § 651 (deduction for trusts distributing current income only), and Code § 661 (deductions for estates or trusts accumulating income or distributing corpus).

These deductions are therefore removed from the category of itemized deductions (and, as such, are not miscellaneous itemized deductions) and are treated as above-the-line deductions allowable in determining adjusted gross income. The suspension of the deductibility of miscellaneous itemized deductions under Code § 67(g) does not affect the deductibility of payments under Code § 67(e)(1).  Further, nothing in Code § 67(g) affects the ability of an estate or trust to take a deduction under Code § 67(b).

Remember that if an individual would ordinarily incur the expense, then it is not subject to Code § 67(e) and is subject to the miscellaneous itemized deduction suspension.

Net operating loss carryovers and capital loss carryovers on the termination of an estate or trust are, like the expenses described above, above-the-line deductions and thus are not subject to the miscellaneous itemized deduction suspension.

CCH Tax Group. IRS Clarifies Estate and Non-grantor Trust Expenses Not Subject to Miscellaneous Itemized Deduction Suspension (Notice 2018-61). July 16, 2018.

States Propose to Recast Tax Payments as Charitable Contributions

The newly enacted IRC § 164(b)(6) created a $10,000 annual limitation on the deductibility of state and local tax (“SALT”). In response, states are considering legislative proposals that would allow their residents to avoid the new limitation.  For example, California, New York and New Jersey, are considering recasting SALT payments as charitable contributions and providing state tax credits up to the full amount of the contributions.

The question is whether a purported charitable contribution to a state is deductible under IRC § 170(a) in light of the donor receiving a “quid pro quo” benefit in the form of a state tax credit in return for the contribution.  A state is qualified to receive tax deductible contributions if the contribution “is made for exclusively public purposes”. However, when a donor makes a purported charitable contribution and receives equal fair market value in return, the transfer will be considered to lack donative intent and will therefore not be deductible under IRC § 170(a).

But, it is possible that the receipt of a state income tax credit as a result of a charitable contribution to charity does not result in a “quid pro quo transaction” for purposes of IRC § 170(a) if the legislative proposal to recast SALT payments as charitable contributions gives the state’s residents some discretion as to the public purposes to which the contributions will be used. In that way, the contributions would not be the equivalent to a tax payment that would otherwise be required to be paid to the state but, instead, could be arguably motivated by some form of charitable intent and made on a voluntary basis.

LISI Income Tax Planning Newsletter #135 (March 1, 2018) at http://www.leimbergservices.com

Questions? Email jillian@trailstearns.com

Interpretation of Specified Service Businesses under Code § 199A

Tax advisors are confused about which businesses are specified service businesses under Code § 199A, and which are not.  The specified service businesses listed in Code § 199A were all “plucked” from an existing provision under Code § 1202.  However, Code § 199A listed only some, but not all, of the Code § 1202 businesses.  For example, Code § 199A did not list “banking, insurance, financing, leasing, investing, or similar business” found under § 1202(e)(3)(B).

According to Michael Greenwald, a partner at Friedman LLP in New York, he is “ ‘fairly comfortable’ that lawmakers didn’t intend to include them in the list of service businesses that are ineligible for the deduction.”

IRS guidance is expected by the end of June.

Davison, Laura. Old Tax Code Section Answers Questions on New Pass-Through Break. Bloomberg Tax Management Weekly Report. Feb. 26, 2018. (subscription required)