This article is a semiannual review of recent developments in the area of individual federal taxation. It covers cases, rulings, and guidance issued to explain the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, among many other topics. The items are arranged in Code section order.
Sec. 24: Child tax credit
In IR-2018-217, the IRS reminded taxpayers of the changes to the child tax credit in the TCJA. The income limitation has increased to $400,000 for married couples and $200,000 for single taxpayers, and the amount of the credit has increased to $2,000 per child with up to $1,400 refundable. There is also a new $500 credit for other dependents such as children over 17 and other qualifying relatives.
Sec. 31: Tax withheld on wages
In Program Manager Technical Advice (PMTA) 2018-015, the IRS determined that an employer's payment of taxes that should have been withheld in a prior year did not create wages to the employee in that prior year. In the examination in which this issue arose, an employer was determined to have provided an employee $10,000 of taxable fringe benefits that had not been reported. The employer was assessed $4,030 in income tax withholding and the employer and employee shares of Federal Insurance Contributions Act (PICA) taxes. The employer was required to issue a Form W-2c, Corrected Wage and Tax Statement, to the employee reporting the fringe benefit income of $10,000.
The employee was not given credit for income tax that was required to be withheld, was not withheld, and was paid by the employer, as this was the employer's liability, not the employee's. The taxes are not included in the employee's income, but the employee is given credit for the employee FICA taxes paid, which are reported on the Form W-2c in box 4, "Social Security tax withheld," and box 6, "Medicare tax withheld."
Sec. 36B: Premium tax credit
In Notice 2018-84, the IRS provided interim guidance clarifying how the suspension of the personal exemption applies to certain rules under Sec. 36B. Under the TCJA, the personal exemption for the taxpayer, spouse, and dependents is reduced to zero for years 2018-2025.
The premium tax credit rules under Sec. 36B apply whether or not a taxpayer claims or claimed a personal exemption deduction under Sec. 151 for an individual.
Notice 2018-84 states that for purposes of the regulations under Secs. 36B and 5000A, taxpayers are considered to have claimed a personal exemption for themselves if they file a tax return for the year and do not qualify as another taxpayer's dependent. Further, a taxpayer is considered to have claimed a personal exemption for an individual if the individual's name and Social Security number are listed on page 1 of Form 1040, U.S. Individual Income Tax Return.
In Rev. Proc. 2018-34, the IRS provided indexing amounts for certain provisions of the Patient Protection and Affordable Care Act, PL. 111-148, under the premium tax credit.
In Rev. Proc. 2018-43, the IRS provided the 2018 monthly national average premiums for health plans that have a bronze level of coverage.
Sec. 61: Gross income defined
Donations to pastor: In Felton, (1) the taxpayer was the founder and pastor of Holy Christian Church in St. Paul, Minn. (with a congregation of about 600 families), and Holy Christian Church International, which set up churches in Rwanda, Liberia, Jamaica, Florida, Louisiana, and another one in Minnesota. The taxpayer's wife also played an important role as the pastor of women's affairs and by helping run the church.
Contributions from the church congregation were managed with a system of colored envelopes: gold for special projects and retreats and white for contributions to sustain the church. However, these envelopes also included a "pastoral" line that delineated contributions intended specifically for the taxpayer. White envelopes were available at the church's entrance and passed out by ushers during services. Both white and gold envelope contributions were tracked and included in the members' annual contribution statements. Blue envelopes, which were used to contribute directly to the taxpayer, were handed over to him unopened and were not tracked by the church. Church members were informed that those contributions were not tax-deductible. The taxpayer preached about tithing and making offerings in white envelopes, but he did not preach about personal donations in blue envelopes.
Although the church's executive board authorized a salary for him in 2008 and 2009, the taxpayer did not take it. He received, in both 2008 and 2009, $40,000 of personal donations from some members of the congregation in white envelopes, which he reported as wages. The church also gave him a parsonage allowance of almost $80,000 per year. In addition, in both 2008 and 2009, the taxpayer received over 1230,000 in blue-envelope cash and personal checks from his congregants in addition to their regular church offerings.
Among other issues, the Tax Court was tasked with determining whether these blue-envelope transfers were non-taxable gifts, as the taxpayer contended, or taxable income payments. After analyzing the following factors found in case law on donations to clergy, the court determined that the payments were taxable income:
* Whether the donations were objectively provided in exchange for services;
* Whether the cleric (or other church authorities) requested the personal donations;
* Whether the donations were part of a routinized, highly structured program and given by individual church members or the congregation as a whole; and
* Whether the cleric received a separate salary from the church, and the amount of that salary compared with the personal donations.
Lawsuit settlement: In IRS Letter Ruling 201831011, the taxpayer, a bankruptcy estate, was created in response to an unfavorable judgment against the insured, who fatally injured a person with his automobile. The professional negligence of the law firm representing the insured resulted in a significant judgment against the insured. As a fiduciary for the creditors of the bankruptcy estate, comprising almost exclusively the victim's family, the taxpayer expected to distribute the proceeds of the settlement payment to the victim's family. As such, the ruling concluded that the subsequent settlement payment stemming from the resulting malpractice lawsuit is a return of capital to compensate for a loss or destruction of the capital of the insured. No economic gain benefited the insured personally. Therefore, the payments were excludable from gross income, as they were deemed a return of capital to compensate for a loss or destruction of capital.
State grants: Another letter ruling, IRS Letter Ruling 201816004, involved a state-run home improvement program that offers grants to or on behalf of in-state homeowners of owner-occupied residences whose houses meet requirements demonstrating a need for certain building-code-based structural reinforcements (e.g., the location of the home, the home's age and physical characteristics, and the grant recipient having an insurance policy with the taxpayer). The taxpayer is the state entity establishing the program. The potential for significant harm reduction, in terms of avoiding both property damage and ensuring the safety of occupants, motivated the taxpayer to pursue the program. However, the structural and substantial home improvements are not incidental to the program's benefits, as the homeowners obtain the tangible benefits of a safer and more desirable home that is better able to withstand certain disasters. Thus, grants that the taxpayer provides to or on behalf of homeowners under the program are accessions to wealth that are includible in the recipients' taxable income under Sec. 61. The Sec. 139(g) general welfare exclusion does not apply, as the grants the taxpayer provided are not based on individual or family need. Moreover, the grants are paid to eligible homeowners regardless of income to mitigate the effects of future disasters, not to alleviate suffering and damage resulting from a disaster.
Sec. 104: Compensation for injuries or sickness
Veterans' disability payments: The IRS announced that any veteran who received disability severance payments after Jan. 17, 1991, and included that payment as income should file Form 1040X, Amended U.S. Individual Income Tax Return, to claim a credit or refund of the overpayment attributable to the disability severance payment. (2) Veterans can either submit a claim based on the actual amount of their disability severance payment by completing Form 1040X or claim a standard refund amount based on the calendar year (an individual's tax year) in which they received the severance payment. Claiming a standard refund avoids the need to access the original tax return from the year of the lump-sum disability severance payment. The Department of Defense will issue letters to veterans who received a one-time lump-sum disability severance payment when they separated from their military service with instructions on how to claim the refunds to which they are entitled. These refunds must be claimed within one year from the date of the Department of Defense letter.
Police benefits: In IRS Letter Ruling 201819004, the taxpayer, a state entity, implemented a benefits plan for police officers who either died or suffered injury in the line of duty. A police officer or a surviving spouse of a police officer receiving these benefits will be allowed to exclude the benefits from gross income as benefits under a statute in the nature of a workers' compensation act under Sec. 104(a)(1) to the extent they do not exceed 50% of the police officer's final average compensation. Benefits that exceed the 50% threshold will be classified as gross income. However, if the disability benefits and line-of-duty death benefits are paid under the plan to former spouses of police officers under eligible domestic relations orders, those benefits are...