Current developments in taxation of individuals.

• Author: Bowles, Katie

This update surveys recent federal tax developments involving individuals. It summarizes notable cases, rulings, and guidance on a variety of topics issued during the 12 months ending October 2022. The update was written by members of the AICPA Individual 6c Self-Employed Tax Technical Resource Panel. The items are arranged in Code section order.

As it does each year, the IRS issued updates to certain procedural matters, in Rev. Procs. 2022-1, 2022-2, and 2022-3. The first one is the revised procedures for issuing letter rulings; it was modified by Rev. Proc. 2022-10 and amplified by Rev. Proc. 2022-19. The significant changes from Rev. Proc. 2021-1 are:

* Taxpayer identification numbers (TINs) and contact information are required for all interested parties;

* Electronic signatures are allowed on Form 2848, Power of Attorney and Declaration of Representative.

* Income tax determination requests to the Small Business/Self-Employed Division can only be submitted electronically;

* The address for paper requests has been consolidated; and

* The fee for additional time to make an S election is the same as the fee for Sec. 9100 relief.

Revised procedures for furnishing technical advice (Rev. Proc 2022-2) were updated for the same electronic signature requirements as in Rev. Proc. 2022-1. Annually, the third revenue procedure issued updates the "no rule" listing. Rev. Proc. 2022-3 was amplified and modified by Rev. Proc. 2022-19, amplified by Rev. Proc. 2022-28 and Rev. Proc. 2022-32. The 2022 version indicates that whether a taxpayer is engaged in a "specified service trade or business" for purposes of Sec. 199A is an area for which rulings will not ordinarily be issued. (1)

Sec. 24: Child tax credit

Tiebreaker for credits tied to dependents: In Gopi, (2) the Tax Court denied the additional child tax credit, earned income tax credit (EITC), head-of-household status, and dependency for two grandchildren of the taxpayer. The taxpayer's daughter moved in with the taxpayer and did not reveal that she was married. The taxpayer supplied all of the grandchildren's support except for some tax-free benefits provided to his daughter. He was unaware that his daughter was married and had filed a joint return with her husband for the tax year in question that also claimed the same children as dependents as the taxpayer did. Although the taxpayer qualified for all of the credits and dependency exemptions, the tiebreaker rule applies when more than one individual claims the same child or children as dependents, i.e., which individual is the parent of the qualifying child or children. (3) Therefore, the Tax Court held, the grandfather did not qualify for the child-related tax benefits.

Noncustodial parent allowed credit: In Hicks, (4) the taxpayer and his children's mother never married but had entered into a series of agreements about who could claim dependency exemptions. Each parent was to claim one of the two children each year. The mother had custody for more than half of each year but lived with her mother and did not file a tax return for 2014, the year in question. The taxpayer and the children's mother lived apart from one another. The grandmother (the mother's mother) claimed both children as dependents and claimed the child tax credit. The father provided more than half of both children's support. Although the father did not attach to his return Form 8332, Release/Revocation of Re/ease of Claim to Exemption for Child by Custodial Parent, or other required documentation to show his entitlement to the credit, he did provide it upon examination and was granted the credit for one child. (5)

Sec. 32: Earned income tax credit

Nonfilers can claim the EITC and other credits: Rev. Proc. 2022-12 was issued Jan. 24, 2022. It allows nonfilers to claim the EITC, the child tax credit, and/or the recovery rebate credit for the 2021 tax year. A special procedure applies to certain individuals who (1) were not required to file a tax return for 2021; (2) had gross income for the year less than the applicable standard deduction; (3) had no adjusted gross income (AGI); and (4) had not already filed a 2021 return. These nonfilers can use a prescribed method to file a return electronically to claim the credits. The revenue procedure also allows nonfiling individuals to file a simplified return for 2021 on paper or electronically to claim the child tax credit and/or the rebate recovery credit.

EITC FAQs: On March 2, 2022, the IRS issued a fact sheet on the EITC for tax year 2021 that answered 17 frequently asked questions (FAQs). (6) The EITC was expanded for 2021, and more taxpayers became eligible for it.

On May 25, 2022, the FAQs were updated. Q&A-15 explained that taxpayers could use their 2019 earned income to figure the 2021 EITC. Higher earned income in 2019 would allow a higher credit. Taxpayers who filed no returns for 2020 or 2021 previously or did not claim the EITC on the previously filed return were directed to file a late or amended return based on 2019 earned income.

Dependency is necessary for the EITC: In one Tax Court case, the taxpayer had three children with his former spouse. (7) The marital separation agreement awarded full custody of the children to the former spouse, although the children spent specified weekends and four weeks during the summer with the taxpayer. The taxpayer, who did not include with his return a Form 8332, was not allowed a dependency exemption for one of the three children, whom he claimed as a dependent and as a qualifying child for the EITC. His EITC claim was likewise disallowed for one tax year and partially disallowed for another.

Sec. 36B: Refundable credit for coverage under a qualified health plan

Final regulations: The IRS released final regulations (8) under Sec. 36B regarding the affordability of employer-sponsored minimum essential coverage for purposes of the Sec. 36B premium tax credit. Some commentators had described the previous regulations as containing a "family glitch," in that only the employee's cost of coverage had been taken into consideration for the cost of covering the employee's family members and not the cost for the entire family. Proposed regulations issued in April 2022 were adopted with minor changes, effective Dec. 12, 2022. Treasury and the IRS stated in a preamble they believe these regulations represent a better reading of the relevant statutes. Over 3,000 comments had been received on the proposed regulations, most of them positive.

Cafeteria plan guidance: The IRS issued Notice 2022-41, which expands "change in status" elections for Sec. 125 cafeteria plans to allow employees to revoke a family coverage election to allow family members to enroll in a health care exchange plan. This notice was issued in conjunction with the final regulations under Sec. 36B described in the preceding paragraph. It is for elections effective on or after Jan. 1, 2023, and amplifies Notice 2014-55.

Calculating the premium tax credit: Rev. Proc. 2022-34 was issued to make indexing adjustments to calculate the premium tax credit for 2023. The required contribution percentage (now 9.12%) is updated by this revenue procedure, effective for plan years beginning in calendar 2023. Rev. Proc. 2014-37 is supplemented.

Advance premium tax credits: In Sek, (9) married taxpayers and their children were covered by COBRA (10) after the husband left his employment. When their COBRA coverage ended in August 2016, they purchased medical insurance through the New York state health exchange for the remainder of the year. The taxpayers claimed a Sec. 35 health coverage tax credit (HCTC) on their return for 2016. They also claimed a premium tax credit for all of 2016 on an amended return. The taxpayers stipulated before trial in the Tax Court that they were ineligible for the HCTC. The court, however, allowed a premium tax credit for months in 2016 after August, when they were enrolled in insurance through the exchange.

In another premium tax credit case, the taxpayers deducted a capital loss exceeding $123,000 on their tax return, received an advance premium tax credit, and claimed a premium tax credit for the year. (11) In Tax Court, they unsuccessfully disputed the IRS's denial of a current loss in excess of $3,000. As a result, the court held, the taxpayers' recalculated income exceeded eligibility limits for any advance premium tax credit or premium tax credit.

Sec. 59(e): Optional 10-year write-off of certain tax preferences

Extension to make an election under Sec. 59(e): In several letter rulings, the IRS was asked to rule on requests for a 120-day extension to make an election under Sec. 59(e) to deduct ratably over a 10-year period Sec. 174 research or experimental (R&E) expenditures. In one letter ruling, (12) the taxpayer inadvertently failed to attach a Sec. 59(e) election statement to its timely electronically filed income tax return, which was prepared as though the election statement had been properly attached.

In three other letter rulings, (13) the taxpayers intended to make an election under Sec. 59(e) to deduct ratably over a 10-year period their R&E expenditures, but the statement required to make the election was not timely filed with the income tax return. In all cases, the IRS ruled favorably and granted a 120-day extension to make the election, noting that the taxpayers acted reasonably and in good faith and that granting relief would not prejudice the government's interests.

Revocation of original Sec. 59(e) election and extension to make new elections: In another letter ruling, (14) the IRS was asked to rule on whether to (1) permit the taxpayer to revoke its original Sec. 59(e) elections to capitalize and amortize intangible drilling and development expenditures and mining exploration expenditures for the tax year, and (2) grant an extension of time for the taxpayer to make new elections under Sec. 59(e) to capitalize and amortize the expenditures.

At issue was...