726 | TaxConnections (2024)

A recent Tax Court case illustrates the importance under current case law of thinking about the tax consequences of a potential verdict or settlement early on and attempting (if the facts allow) to establish a basis for exclusion from federal income tax throughout the course of litigation.

InEstate of Finnegan v. Comm’r, T.C. Memo. 2024-42, the question before the Tax Court was whether payments under a settlement of certain constitutional and civil rights claims were excluded from income undersection 104 of the Internal Revenue Code.

The Indiana State Police (“ISP”) had investigated husband and wife taxpayers inEstate of Finneganfor medical neglect resulting in the death of their daughter at the age of fourteen. Criminal charges were filed against husband and wife taxpayers but later were dismissed.

Nevertheless, the Indiana Department of Child Services (“DCS”) removed the remaining children from husband and wife taxpayers’ home. While the children were eventually returned home, DCS continued its investigation.

Husband and wife taxpayers filed suit in state court against DCS to invalidate certain determinations that DCS had made against them, including (1) that there was medical neglect in connection with their deceased daughter based on the postponement of a cardiology checkup; (2 that their daughter’s death was caused by physical abuse; and (3) that their remaining children were in a life/health endangering environment. The state court found in husband and wife taxpayers’ favor.

Husband and wife taxpayers along with their children sued various employees of the State of Indiana in federal court for their actions after their daughter’s and sister’s death. The suit was brought under42 U.S.C. § 1983for violation of their civil rights under state law, federal law, and theFirst,Fourth,Sixth, andFourteenthAmendments to the U.S. Constitution. A jury awarded the taxpayers compensatory damages totaling $31.5 million, with amounts specifically awarded for violations of each taxpayer’s constitutional rights. Ultimately, the case was settled for $25 million.

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Digital or virtual currencies are a medium of exchange, but are not regular money.

Unlike paper bills and coins, cryptocurrencies are not issued or backed by the U.S. government or any other government or central bank. The lack of a physical token to count and hold may confuse some. Rather, Bitcoin and other cryptocurrencies are a form of digital currency used in electronic payment transactions—no coins, paper money or banks are involved; there are zero to minimal transaction fees; transactions are fast and not bound by geography; and, like using cash, transactions are anonymous.

Digital currencies are stored in digital wallets, which are software or apps installed by users on their computer or mobile device.

Each digital wallet contains encrypted information, called public and private keys, that is used to send and receive the digital currency. All digital currency transactions are recorded in a virtual public ledger called the “blockchain,” which is maintained by digital currency “miners.” These miners can be anyone, anywhere in the world, who is willing to invest in the specialized computer hardware needed to rapidly process complex computations. Miners are awarded digital currency, like Bitcoin, Ripple, Dogecoin, and Litecoin, in exchange for verifying each transaction and adding it to the blockchain.

At least 35 states, Puerto Rico and Washington, D.C., have introduced or have pending legislation on cryptocurrency, digital or virtual currencies, and other digital assets in the 2024 legislative session.

Examples of enacted legislation include:

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MostU.S. citizensandpermanent residentswho work in the United States need to file a tax return if they make more than a certain amount for the year.

The IRS has a variety of information available on IRS.gov to help taxpayers, including aspecial free helppage. Here are some specific details to help people if they need to file a tax return.

Factors That Affect Whether Someone Needs To File A Tax Return

Here are some of the things that affect whether someone must file a tax return.

Gross income.Gross income means all income a person received in the form of money, goods, property and services that aren’t exempt from tax. This includes any income from sources outside the United States or from the sale of a main home, even if you can exclude part or all of it.

Required filing threshold.People need to see if their gross income is over the required filing threshold.Filing statuseshave different income thresholds, so individuals may need to consider their potential filing status as well.

There are five filing statuses:

• Single
• Head of household
• Married filing jointly
• Married filing separate
• Qualifying surviving spouse

Find details on tax filing requirements withPublication 501, Dependents, Standard Deduction, and Filing Information.

Tax Year 2023 Filing Thresholds By Filing Status

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WASHINGTON — National Taxpayer Advocate Erin M. Collins released her 2023 Annual Report to Congress, describing 2023 as a year of “extraordinary transition for the IRS and therefore for taxpayers.”

The report credits the Internal Revenue Service with substantially improving taxpayer services and developing plans to transform the taxpayer experience in the coming years, but it identifies paper processing as an area of continuing weakness.

By law, the Advocate’s report is required to identify the 10 most serious problems taxpayers are experiencing in their dealings with the IRS and to make administrative and legislative recommendations to address those problems. Before cataloging taxpayer challenges, however, Collins praised the IRS for taking notable strides forward.

“Overall, the magnitude of successes exceeded the areas of weakness in 2023, and most metrics showed significant improvement from the depths of the [COVID-19] pandemic,” Collins wrote in the report’s preface. The report says the IRS virtually eliminated its backlog of unprocessed original individual income tax returns (Forms 1040) and substantially improved telephone service.

Taxpayer service challenges

“When I released the National Taxpayer Advocate’s 2020 report, I wrote that the IRS in most cases ‘can effectively handle whatever it can automate,’ and when I released our 2021 report, I wrote that ‘paper is the IRS’s kryptonite,'” Collins said in releasing the new report. “Those observations continued to hold true in 2023. The areas in which taxpayers continued to experience delays were primarily those that required employees to process tax returns and taxpayer correspondence.”

Extraordinary delays in assisting victims of identity theft. At the end of fiscal year (FY) 2023, nearly half a million taxpayers with cases pending in the IRS’s Identity Theft Victims Assistance (IDTVA) unit were waiting an average of almost 19 months for the agency to resolve their identity theft problems. “If it weren’t for the significant number of challenges affecting larger groups of taxpayers, this would be headline news, and it should be,” Collins wrote. “Many taxpayers depend on their tax refunds to meet their living expenses, particularly low-income taxpayers who receive Earned Income Tax Credit (EITC) benefits that [approached] $7,000 for tax year 2022.” Noting that 69% of taxpayers whose identity theft cases the IDTVA unit resolved had adjusted gross incomes at or below 250% of the federal poverty level, Collins called the delays “unconscionable” and urged the IRS to place a higher priority on resolving cases quickly.

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WASHINGTON – With tax season rapidly approaching, the IRS reminds employers that Jan. 31 is the deadline for submitting wage statements and forms for independent contractors with the government.

Employers must file their copies ofForm W-2, Wage and Tax Statement, andForm W-3, Transmittal of Wage and Tax Statements, with the Social Security Administration by Jan. 31.

The Jan. 31 deadline also applies toForms 1099-MISC, Miscellaneous Income, andForms 1099-NEC, Nonemployee Compensation, that are filed with the IRS to report non-employee compensation to independent contractors. Various other due dates related to Form 1099-MISC, Form 1099-K and Form 1099-NEC, including dates due to the IRS, can be found on the forms’instructions.

The IRS offers afree electronic filing service for the Form 1099 seriesusing the Information Returns Intake System (IRIS). Filers can also use this online portal to prepare payee copies for distribution, file corrections and request automatic extensions.

New Filing Requirements

New electronic filing requirements affect Forms W-2 that are required to be filed in 2024. Businesses that file 10 forms or more must file W-2s and certain information returns electronically. SeeNew electronic filing requirements for Forms W-2for more information.

E-filing is the quickest, most accurate and convenient way to file forms. For more information on e-filing Forms W-2, employers can refer toEmployer W-2 Filing Instructions & Informationon the Social Security Administration’s website.

Key Points To Remember

• Extensions to file are not automatically granted. Employers may request a 30-day extension to file Forms W-2 by submittingForm 8809, Application for Extension of Time to File Information Returns, by Jan. 31.
• Filing Form 8809 does not extend the due date for furnishing wage statements to employees. A separate extension must be filed by Jan. 31. SeeExtension of time to furnish Forms W-2 to employeesfor more information.
• Filing by the deadline helps the IRS to fight fraud by making it easier to verify income. Employers can help support that process and avoid penalties by filing the forms on time and without errors.
• Penalties may be assessed for failure to file correctly and on time. For more information visit the IRS’Information Return Penaltiespage.
• Form 1099-K $600 reporting threshold delayed. This means that for 2023 and prior years, payment apps and online marketplaces are only required to send out Forms 1099-K to taxpayers who receive over $20,000 and have over 200 transactions. For tax year 2024, the IRS plans for a threshold of $5,000 to phase in reporting requirements.

The IRS encourages employers and taxpayers to visitAbout Form W-2, Wage and Tax StatementandPublication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2GPDF, for more information.

IR-2024-06

Prologue – Taxation, Fairness And “The Man On The Street”

Something I think is sometimes lost in tax policy debates: public perceptions do not equate fairness to diminishing inequalities. Not all tax inequality decreasing measures will be perceived as fair.

Tax policy is as much about political economy, as efficiency and equity.

— Rita de la Feria (@delaFeriaR) September 24, 2023

Imagine asking an individual (who was not a tax academic, lawyer or accountant) the following two questions:

1. Do you think that people should be forced to pay taxes on income never received?

2. Do you think people should be forced to pay taxes on on income from the previous 30 years that they had never received?

The average person would be shocked by the possibility of this.

It may be difficult for the average person to understand Subpart F’s attribution of the income of a corporation to a shareholder. The average person would not doubt the unfairness of attributing 30 years of untaxed earnings of the corporation to the shareholder (especially when the income was never received by the shareholder).

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Prologue – Taxation, Fairness And “The Man On The Street”

Something I think is sometimes lost in tax policy debates: public perceptions do not equate fairness to diminishing inequalities. Not all tax inequality decreasing measures will be perceived as fair.

Tax policy is as much about political economy, as efficiency and equity.

— Rita de la Feria (@delaFeriaR) September 24, 2023

Imagine asking an individual (who was not a tax academic, lawyer or accountant) the following two questions:

1. Do you think that people should be forced to pay taxes on income never received?

2. Do you think people should be forced to pay taxes on income from the previous 30 years that they had never received?

The average person would be shocked by the possibility of this.

It may be difficult for the average person to understand Subpart F’s attribution of the income of a corporation to a shareholder. The average person would not doubt the unfairness of attributing 30 years of untaxed earnings of the corporation to the shareholder (especially when the income was never received by the shareholder).

Moore and Retroactivity – The Readers Digest Version

This history of the Moore case is described by Professors Brooks and Gamage as follows:
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Moore and Retroactivity – The Readers Digest Version

"The Little Red Transition Tax Book" – Everything you need to know about the 965bmandatory repatriation tax but didn't know to ask. A horrific abuse of #Americansabroad in a @citizenshiptax and #FATCA world! https://t.co/j7v1Asreek

— U.S. Transition Tax – Subpart F and #GILTI (@USTransitionTax) June 26, 2023

This history of the Moore case is described by Professors Brooks and Gamage as follows:

The taxpayers brought suit challenging the MRT, arguing that it was an unapportioned direct tax and therefore in violation of the Constitution.25 (They also argued that its seeming retroactivity was in violation of the Due Process clause of the Fifth Amendment,26 though this was not the main focus of the case, nor did the dissenters address it, nor do the petitioners raise the issue in the cert petition, so we put that claim aside.27) The district court dismissed the claim, and a three-judge panel of the Ninth Circuit unanimously affirmed the dismissal.28 The taxpayers’ subsequent petition for rehearing and rehearing en banc was denied.29

The Chamber of Commerce’s amicus cert brief filed on March 27, 2023 included on page 18:

The Constitution imposes numerous safeguards that prevent the government from making rapid changes that would unsettle expectations. Such principles “find[] expression in several [constitutional] provisions,” Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994), and often implicate tax laws.

First, “a retroactive tax provision [can be] so harsh and oppressive as to transgress the constitutional lim-itation” of due process. Carlton, 512 U.S. at 30. When “Congress act[s] promptly and establishe[s] only a modest period of retroactivity,” like “only slightly greater than one year,” a tax law’s retroactive effect has been deemed permissible. Id. at 32–33. But a tax law that deals with a “novel development” regarding “a transfer that occurred 12 years earlier” has been held unconstitutional. Id. at 34 (discussing Nichols v. Coolidge, 274 U.S. 531 (1927)). Here, of course, the Ninth Circuit called the MRT a “novel concept,” and it reached back—not one, not twelve—but more than thirty years into the past, long after companies made decisions about where to locate their long-term as- sets.2 App 6. The MRT’s aggressive retroactivity showcases the danger of unmooring income from its defining principle of realization. Erasing the realization requirement upends taxpayer expectations—leaving them looking over their shoulders for what unrealized gain Congress might next call “income.”

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Johnson v. Comm’r, 160 T.C. No. 2| January 25, 2023 |Nega, J. | Dkt. No. (Consolidated) 19973-18, 19975-18, 19978-18, 20001-18

Summary: In this 32-page, consolidated opinion, the Tax Court addresses deficiencies from disallowance of a 26 U.S.C. § 179D energy efficient building property deduction claimed by Edwards 4 Engineering, Inc. (Edwards), an S corporation, for the 2013 taxable year. Petitioners (6 total) are shareholders of Edwards and reported their proportionate shares of the claimed deduction on their individual tax returns.

Edwards contracted with a federal government entity, the VA, to supply and install components of a federal building’s HVAC system. The VA signed a letter that agreed, pursuant to I.R.C. § 179D(d)(4), to allocate to Edwards the full amount of the I.R.C. § 179D deduction to which the VA would otherwise be entitled for the installation of the property. Edwards maintained a full-time staff at the VA to perform the services. Edwards presented evidence of hours logged, invoices submitted, and payments received for the various projects involved in the overall service arrangement. Edwards also presented evidence of subcontractors engaged and paid. Edwards also engaged Alliantgroup, LP (Alliantgroup), to conduct an Energy Efficient Commercial Building Tax Deduction Study (study) for the 2013 taxable year with respect to a certain Building 200. An allocation letter was presented to Edwards, and a VA representative signed off on the letter. The allocation letter stated, in relevant part, that “the owner of the Building allocates the full federal income tax deduction available under Section 179D attributable to the HVAC . . . to Edwards . . . for their work on the Building.” Attached to the allocation letter was a table which stated the placed in service date and the cost of the property installed in Building 200 with respect to the projects at issue. Alliantgroup then proceeded with conducting the study. A certificate of compliance related to Building 200 was issued, stating, among other things, that the total annual energy and power costs of this building had been reduced by more than 50 percent due to the installation of the systems, among other qualifying and compliance conclusions regarding Edwards’ work and services performed on the building. The study was performed in accordance with section 179D(d)(6)(C) and Notice 2006-52, section 5.05, 2006-1 C.B. at 1179. See Key Points of Law below for further reference to Notice 2006-52. Alliantgroup informed the VA that Alliantgroup had completed the study for Building 200 and determined that Edwards had been allocated a section 179D deduction in the amount of $1,037,237. The letter provided the projected annual energy costs for Building 200 and a list of the energy efficient features installed in Building 200.
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Introduction And Purpose

'Great for landlords, horrible for renters': How a runaway rental market has become Toronto's latest housing nightmare https://t.co/cPT0A0BfS5

— Penalty Taxes On Vacant, Empty Or Underused Homes (@VacantHomeTax) February 8, 2023

Many Canadian cities are experiencing the combined effects of a shortage of affordable housing and a rise in housing prices. In short housing (whether to own or to rent) has become less available and more expensive. Factors contributing to this include: Investors preferring to “rent” their investment properties on short term rental platforms rather them releasing them into the rental market, Provincial Landlord and Tenant laws which impose laws on small landlords which are perceived as unfair, increases in property values (caused by low interest rates) which have caused an imbalance between the cost of buying residential real estate and the amount it can be rented for. (It makes no sense for a person to purchase a property for one million dollars and rent it for $2000 per month.)

Canadian Cities – Clear Laws And Easy To Understand And Significant Discontent From U.S. Owners

As the Gov of Canada and major CDN cities have implemented taxes based on vacant/underused homes, I am reminded of this interesting 2017 WSJ article written by a nonresident of Canada who owned a Vancouver condo. https://t.co/yYZWUgOEyH via @WSJopinion

— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) January 21, 2023

The above tweet references a fascinating article Wall Street Journal article written in 2017 by a U.S. owner of a Vancouver, BC condominium claiming that the tax was directed at Americans. It’s a fascinating read.

A reply to the above tweet pointed out that:
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With so much going on in our lives, it’s easy to get distracted and forget to pay attention to important things – like filing taxes on time.

Missing your deadline can result in some dire consequences, so we decided to help you out! Here’s a list of all the important dates and other useful information to help US expats stay on track with their taxes in 2023.

US Expat Tax Return Deadline For 2023

Residents of the United States are required to file a Federal Tax Return byApril 18, 2023. One perk of being a US expat is that you’re given an extended deadline to file your tax return. That means that all US citizens living abroad will be granted an automatic two-month extension toJune 15, 2023.

In case you’re worried about getting your taxes done by June 15, you can request an additional 6-months extension.Contact us todayif you think you require more time to file yourU.S. Expat Tax Return, and we’ll file an extension for youfree of charge.

Due Dates For American Expats

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Oliver Wagner, CPA and John Richardson – January 16, 2022

Americans abroad and the presumption of double taxation

Prologue: For whom the bell tolls …

Whether a US citizen lives in (and is a tax resident of) Mexico and works on a ship in international waters

International waters are not a foreign country. https://t.co/hnhfCddLb1

— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) January 15, 2022

Or Whether A US citizen lives in (and is a tax resident of) Holland and is an airline pilot …

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