Larry's Tax Law

Dear Readers:

It is hard to believe that 2015 is almost at an end.  Although this year has gone by quickly, it has proven to be an interesting year in the world of tax law.  During the past twelve months, we have explored numerous tax topics and developments, including tax extender legislation, IRS budget cuts, leadership changes at OPR, IRC Section 1031 exchanges, tax reform, taxation of cannabis, and offshore voluntary disclosure programs.

I feel especially blessed this year.  The support that I have received from the legal, tax and accounting professions has been overwhelming.  In June, the Oregon State Bar bestowed upon me the Taxation Section Award of Merit.  Then, in September, I was elected to the American College of Tax Counsel.  Without your help, these accolades would not have been attainable.  Thank you.

Late this afternoon, President Obama signed into law the tax extenders legislation referenced in my blog earlier today.  Hopefully, we can now complete our client year-end tax planning.

The Protecting Americans from Tax Hikes Act of 2015 Passes Both the U.S. House of Representatives and the U.S. Senate

Late in the day on December 15, 2015, the U.S. House of Representatives passed the Protecting Americans from Tax Hikes Act of 2015 (the “Act”). The Act, which represents a $622 billion tax package, revives many taxpayer-friendly provisions of the Code that expired a year ago.

The Act passed the House with a vote of 318 to 109. Voting in favor of the Act were 77 Democrats and 241 Republicans.

The Act moved to the U.S. Senate, where it was presented along with a comprehensive spending bill. As expected, the Senate voted in favor of the legislation today by a vote of 65 to 33. Consequently, the Act moves from Congress to the desk of President Obama. Most commentators expect that he will promptly sign the Act into law, as his administration has shown strong support.

The Chief Financial Officer’s Act of 1990 (“1990 Act”) was signed into law by President George H.W. Bush on November 15, 1990.  One of the major goals of the 1990 Act was to improve the financial management and to gain better control over the financial aspects of government operations.  One provision of the 1990 Act in this regard established a requirement that the government’s financial statements be audited.  Interestingly, we had not seen comprehensive legislation with this focus since the Budget and Accounting Procedures Act of 1950 was enacted by lawmakers.

As a result of the 1990 Act, the Government Accountability Office (“GAO”) annually audits the financial statements of the Internal Revenue Service (“IRS”).  The general objectives of the audit are two-fold:  (i) to determine whether the IRS’s financial statements are fairly presented; and (ii) to determine whether the IRS is maintaining effective internal controls over financial reporting.

In general, the Oregon income tax laws are based on the federal income tax laws. In other words, Oregon is generally tied to the Internal Revenue Code for purposes of income taxation. As a consequence, we generally look to the federal definition of taxable income as a precursor for purposes of determining Oregon taxable income.

What does this mean to taxpayers in the trade or business of selling recreational or medical marijuana in Oregon?

Currently, it appears these taxpayers are stuck with the federal tax laws. Consequently, unless the Oregon legislature statutorily disconnects from IRC § 280E, for Oregon income tax purposes, all deductions relating to the trade or business of selling medical or recreational marijuana will be disallowed.

I suspect the result of IRC § 280E and its impact on Oregon income taxation will be that many taxpayers in this industry will go to lengthy efforts to capitalize expenses and add them to the cost of goods sold. Caution is advised. The taxing authorities will likely closely scrutinize this issue.

As a general rule, in accordance with IRC § 162(a), taxpayers are allowed to deduct, for federal income tax purposes, all of the ordinary and necessary expenses they paid or incurred during the taxable year in carrying on a trade or business.  There are, however, numerous exceptions to this general rule.  One exception is found in IRC § 280E.  It provides:

“No deduction or credit shall be allowed for any payment paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any state in which such trade or business is conducted.”

I would like to invite you to NYU 74^th Institute on Federal Taxation taking place in New York, New York on October 25-30, 2015, and in San Francisco, California on November 15-20, 2015.

The NYU Tax Institute is one of our country’s most pre-eminent tax conferences for CPAs and attorneys. I am proud to be a presenter on the closely-held business panel of the program on Oct. 29 and Nov. 19. This is my third time speaking at the Institute. This year, I will present a newly-written white paper on qualified subchapter S subsidiaries.

As reported in previous blog posts (January 17, 2014, January 21, 2014, and January 20, 2015), federal budget setbacks continue to severely impact the Internal Revenue Service (“IRS”) and its ability to carry out its lofty mission:

 “[T]o provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.”

Senator Ron Wyden (D-OR), Ranking Member of the United States Senate Committee on Finance, understands the critical role the IRS plays in maintaining our tax system.  In a letter to IRS Commissioner John Koskinen, dated September 2, 2015, Senator Wyden professionally, but directly, questions the agency’s reallocation of IRS limited resources away from information technology (“IT”), enforcement and collection.

Background

Actual or constructive receipt of the exchange funds during a deferred exchange under IRC Section 1031 totally kills an exchange and any tax deferral opportunity.  Treasury Regulation Section 1031(k)-1(f)(1) tells us that actual or constructive receipt of the exchange proceeds or other property (non-like-kind property) before receiving the like-kind replacement property causes the exchange to be treated as a taxable sale or exchange.  This is the case even if the taxpayer later receives the like-kind replacement property. In accordance with Treasury Regulation 1.1031(k)-1(f)(2), a taxpayer is in constructive receipt of money or property if it is credited to his, her or its account; set apart for the taxpayer’s use; or otherwise made available to the taxpayer.

On May 11, 2015, after serving as Director of the Office of Professional Responsibility (“OPR”) for approximately six (6) years, Ms. Karen Hawkins announced her intention to step-down and retire, effective July 11, 2015.

The OPR is responsible for interpreting and applying the Treasury Regulations governing practice before the Internal Revenue Service (commonly known as “Circular 230”).  It has exclusive responsibility for overseeing practitioner conduct and implementing discipline.  For this purpose, practitioners include attorneys, certified public accountants, enrolled agents, enrolled actuaries, appraisers, and all other persons representing taxpayers before the Internal Revenue Service.