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Tuesday, August 15, 2017

Shopping trends and taxes

I like to look at trends because they are interesting and many have tax implications.* Trends may indicate a need to update or modernize tax rules or systems. I'm a bit behind on blogging on this, but several weeks ago, there was an article in Fortune - Phil Wahba, "Major Wall Street Firm Expects 25% of U.S. Malls to Close by 2022," 5/31/17. Reasons included bankruptcies and continuing growth in retail e-commerce sales.

I remember when the US Census Bureau first started reporting retail sales for e-commerce in the 1990s and it was less than 1%.  They just updated data for 2015 and report that e-commerce retail sales represent 7.2% of total sales for 2015 (it was 6.4% in 2014).  That doesn't seem like a lot to me. In contrast, the US Census Bureau reports that for 2015, e-commerce sales of merchant wholesalers represented 30.2% of total sales (it was 28.1% in 2014).

Are retail e-commerce sales going to increase to the point were 25% of US malls will close in the next five years? Seems high to me.  I expect re-purposing where, perhaps, we might do more online shopping while at the mall looking at samples of what we can buy, and getting a latte and recharging our smartphones.  That would use less retail space. Malls might add more ways for people to hang out - activities, fairs, etc.

Tax implications?  A few:
  • More online shopping can mean more uncollected use tax although I suspect a lot of the e-commerce growth will be with Amazon that collects tax in all states (at least on their direct sales).
  • If malls turn into abandoned buildings or vacant lots, property taxes will go down. Is there another need for them?  With an aging population, perhaps the space gets turned into living spaces for older folks - single level, close to public transportation and medical facilities, etc.
What do you think? Will we see 25% of malls close? What will happen to the space?

*For some nostalgia, see this June 2008 blog post on some trends relevant to tax reform.

Wednesday, August 9, 2017

Taxpayer Advocate - FAQs are Trap for Unwary

The IRS National Taxpayer Advocate's  7/26/17 blog post notes that FAQs “can be a trap for the unwary.” She notes:

my view is that the IRS should use FAQs when there is a need to provide guidance on an emergency or highly expedited basis. Examples include relief provided to victims of Hurricane Katrina or victims of the Bernard Madoff Ponzi scheme. However, my recommendation is that the IRS converts FAQs into published guidance as quickly as possible whenever an issue affects a significant number of taxpayers or will have continuing application. U.S. taxpayers are entitled to finality, and the prospect that the IRS may change its position and assess additional tax after a tax return has been filed in reliance on an IRS’s position is simply unfair.

“In addition, to ensure taxpayers understand the limitations of FAQs and other unpublished guidance, we recommend the IRS prominently display a disclaimer near such guidance that says something along the following lines: “Taxpayers may only rely on official guidance that is published in the Internal Revenue Bulletin.  Various IRS functions try to provide unofficial guidance to taxpayers by posting Frequently Asked Questions (FAQs) and other information on Unless otherwise indicated, however, this information is not binding, and taxpayers may not rely on it because it may not represent the IRS’s official position.”[emphasis added]

The IRS recently reminded its examiners that FAQs aren't binding (see my 6/4/17 blog post).

Most FAQs are like IRS publications - just a summary of the law. It is the FAQs, such as those on the Offshore Voluntary Disclosure Program (OVDP), that are not summarizing binding guidance (statute, regulations, IRS rulings published in the IRB, court cases), that are problematic. They are not binding, but there is usually nothing else out there.

It is not just FAQs that are a concern. Chief Counsel Advice (CCA) are also issued where sometimes new interpretations of the law of noted. These are not considered "authority" for purposes of avoiding a taxpayer (Section 6662) or preparer (Section 6694) penalty. For example, CCA 201504011 on how unicap does not apply to a marijuana business in applying Section 280E that disallows deductions, but not cost of sales, for such businesses. Why wasn't this issued as a revenue ruling or as regulations under Section 280E (which has no regulations despite its enactment in 1982 and its increased importance when states started legalizing marijuana in the mid-1990s)? There are also some Information Letters that have not binding underlying authority.

What do you think?

Friday, August 4, 2017

Senate Democrats Tax Reform Principles

On 8/1/17, almost all Senate Democrats plus the two independent senators issued a letter to President Trump, Majority Leader McConnell and Senate Finance Committee Chairman Hatch, on their “key principles for tax reform.” The 45 signers indicate they want to work on bipartisan tax reform. The three key principles they “believe are prerequisites to any bipartisan tax reform effort” are:

    1. Do not increase the tax burden on the middle class and should not benefit the wealthiest individuals.
    2. The legislation should go through the normal bill approach (60 votes) rather than reconciliation. They do not want to see “partisan short-term tax cuts that would result in economic uncertainty and instability and significantly increase our budget deficit.”
    3. Tax reform should be focused on providing a revenue base that meets the needs of our country.  Deep cuts to our corporate, individual, and other tax rates are very costly.  We will not support any effort to pass deficit-financed tax cuts, which would endanger critical programs like Medicare, Medicaid, Social Security and other public investments in the future.
Per the New York Times, absent from the signature list are three senators up for re-election in 2018– Donnelly (IN), Manchin (WV) and Heitkamp (ND) (Alan Rappeport, “After Health Care Victory, Senate Democrats Seek Compromise on Tax Plan,” 8/1/17).
What do you think?

Thursday, July 27, 2017

Ryan Foresees Tax Reform Legislation This Year

Today, House Speaker Paul Ryan released a joint statement on tax reform  (from the six folks working behind the scenes on tax reform - Ryan, Brady, McConnell, Hatch, Mnuchin and Cohn). Here is the key portion about tax changes:

"We have always been in agreement that tax relief for American families should be at the heart of our plan. We also believe there should be a lower tax rate for small businesses so they can compete with larger ones, and lower rates for all American businesses so they can compete with foreign ones. The goal is a plan that reduces tax rates as much as possible, allows unprecedented capital expensing, places a priority on permanence, and creates a system that encourages American companies to bring back jobs and profits trapped overseas. And we are now confident that, without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the U.S. tax base. While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform."

It appears that the plan will:
  • Not be a consumption tax as proposed last June by the House Republicans. Thus, the plan won't deny a deduction for imports or exempt export revenue. And there is no need to deny a deduction for interest expense of businesses. Also, expensing of business assets is not a given, but there may be non-consumption tax reasons for allowing such expensing.  Also, with asset expensing, it's likely not all business interest expense will be deductible (assuming asset expensing is in the final plan).
  • Include a rate cut for both businesses and individuals. How much of a tax reduction that translates to for taxpayers depends on what changes are made to deductions and credits, the AMT, and for higher income individuals, what happens to capital gain rates and the net investment income tax. 
  • Include a shift to a territorial system. Senator Hatch noted recently that this has bipartisan support and was part of both the House plan and President Trump's 1-page plan.
So, the most significant part of the statement today is the last sentence in the excerpt above - they are not pursuing a border adjustable consumption tax.  The import tax of that was a significant revenue raiser so it also means they need new revenue raisers to support either the 20% corporate rate House Republicans want or the 15% rate President Trump seeks.

But, still lots of questions including what revenue neutral reform means in terms of how much base broadening will be needed and how the effect of changes are measured. The President's budget proposal (page 115) "assumes deficit neutral tax reform." What is the best change approach for economic growth? Will the drafters wait for Senate Finance Committee to review the ideas they received in July?

#trih - tax reform is hard

But with continued hearings, discussion, and work likely already underway on drafting legislative language, perhaps we will see a proposal this year.  And, rate reduction, base broadening and a shift from worldwide to territorial all mean major changes and rethinking for tax compliance and planning. And we'll also need to see what the states do in response to any federal changes.

What do you think?

Thursday, July 20, 2017

ACA tax hits the court

This is the first case I've seen dealing with application of the Affordable Care Act (ACA). Yes, we had cases in the U.S. Supreme Court dealing with legality of some of the taxes and mandates, but this July 12, 2017 decision from the U.S. Tax Court gets at application of the advance Premium Tax Credit (APTC). When an eligible person purchases health insurance on the exchange (such as Covered California), and their household income is 400% or less of the federal poverty line, they get a credit that can be applied to the monthly premiums (by having the government send the money directly to the insurance provider) or claimed when filing that year's income tax return.

If you get the credit in advance and it turns out your income exceeds 400% of the federal poverty line, you have to pay the entire advance credit back!  That can be a hefty bill, as the Walkers discovered.

In Walker, TC Summary Opinion 2017-50, the court agreed with the IRS that the couple owed $12,924 for 2014 because their modified AGI exceeded 400% of the federal poverty line making them ineligible for the PTC that Covered California provided to them in advance. The IRS had originally also assessed a §6662 penalty of $2,584, but dropped that,

The couple’s monthly premium before the APTC was $1,378 but only $301 with the APTC. On their 2014 return, they reported AGI of $63,417 which included wages, retirement earnings and taxable Social Security income. After the return was filed, the couple separately filed Form 8962 for the PTC reconciliation. That form showed modified AGI of $75,199 (included the non-taxable Social Security income). As this exceeded 400% of the FPL, they were ineligible for the PTC. For 2014, the FPL for a family of two in California was $15,510; 400% of this amount is $62,040.

The couple told the court that if they had known they did not qualify for the PTC, they would not have purchased the insurance. While the court noted that Covered California may have erred in its information provided to the couple, the statute is clear that a taxpayer with income above 400% of the FPL may not claim a PTC.

That's a harsh result, but what the law provides. The exchange is supposed to use past tax return information along with information from the individual to determine eligibility. It sounds like the Walkers are retired (but not on Medicare which would make them ineligible for the exchange and PTC). A good question that should been asked of this couple was whether they might continue to have some earned income despite being retired. That is what may have put them over the 400% of the FPL (wages or perhaps a larger than planned withdrawal from their retirement plan).  They should have been counseled to take a much smaller APTC and to check their income monthly to see if they should be getting an APTC at all.

And note that the Walker's PTC is high because insurance costs more for older couples. However, affordability is still tied to 400% of the FPL even though when insurance costs more, you need much more income to pay for it. The law expects that the Walkers can use 22% of their income here to pay for health insurance! This is one of a few fixable flaws in the PTC.

One small potential consolation that I think is only explained in the  IRS Publication 502 on medical expenses is that the PTC paid back by the Walkers is treated as a health insurance payment rather than a tax. They can deduct it if they have enough to itemized and to the extent their medical expenses exceed 10% of AGI. This might not yield any deduction for them though and doesn't make up for the fact that they would have skipped the insurance if they had know they were not going to get a subsidy to help pay for it.

There are likely many other taxpayers in this situation.  If such individuals filed their return correctly, the payback of excess APTC will show up. If they fail to do the reconciliation, the IRS has enough information from the 1040 and Form 1095-A to determine how much, if any, needs to be paid back.

What do you think? Is there a better way to help a couple like the Walkers?