Tax Alert

• Publication year: 2023

TAX ALERT

Written by Dennis I. Leonard, Esq.^*

This article summarizes select developments in relevant federal and state law since the last issue of the article Quarterly that may be of interest to tax, trust, and estate attorneys.

I. FEDERAL ADMINISTRATIVE & LEGISLATIVE ACTIVITIES

A. Final Regulations re: Centralized Partnership Audit Regime

T.D. 9969 - EFFECTIVE DECEMBER 9, 2022

Several years ago, the Bipartisan Budget Act created the "centralized partnership audit regime", which changed how the IRS audited most partnerships. IRS recently published final regulations making various regulatory updates and clarifications. While the new regulations are narrow in scope, they are worth noting for practitioners involved in partnership income tax examinations.

Most substantively, the new regulations except several "special enforcement matter" items from the centralized partnership audit regime, and permit the IRS to instead audit the partners directly. The list of "special enforcement matters" include criminal investigations of a partner, a partner's erroneous inflation of the income tax basis of assets contributed to the partnership, and a termination and/or jeopardy assessment of a partner under IRC section 6861. While each of these actions may result in a corresponding adjustment to a partnership-related item, these specified "special enforcement matters" need not be brought under the centralized partnership audit regime rules.

The new regulations are effective December 9, 2022 and can be found in Treas. Reg. sections 301.6221(b)-1, 301.6223-1, 301.6225-1, -2, -3, 301.6226-2, 301.6241-3, and 301.6241-7.

B. A New 2023 Version of the Qualified Intermediary Withholding Agreement Is Available

REV. PROC. 2022-43, 2022-52 IRB 1

Certain "qualified intermediaries" are required to withhold income taxes recognized by nonresident aliens and foreign corporations. A Qualified Intermediary Withholding Agreement ("QI Agreement") allows certain foreign qualified intermediaries to enter into agreements with the IRS to simplify their withholding obligations in connection with various transactions, including but not limited to: (a) persons having control, receipt, custody, disposal, or payment of most items of income under IRC, section 1441 of a nonresident alien or foreign legal entity; (b) back up wage withholding under IRC, section 3406; and (c) a foreign partners' share of effectively connected income from publicly traded partnerships under IRC, section 1446. To elaborate, when foreign investors sell U.S. securities, real estate, or other properties, these international taxpayers are subject to withholding on such investments and may face capital gain and depreciation recapture taxes, among others. These taxes can sometimes reach an aggregate of up to forty percent (40%) in states such as California.

Qualified intermediaries (i.e., an eligible person or entity other than the taxpayer) can enter into a Qualified Intermediary agreement with the IRS, which can simplify their obligations as withholding agents. A Qualified Intermediary can certify treaty residence and/or non-U.S. residence on behalf of its direct clients, thereby obtaining a reduced rate of U.S. withholding for its direct non-U.S. customers. The new QI Agreement began its 6-year term January 1, 2023 and will expire accordingly December 31, 2028.

C. Required Minimum Distributions for Those 72 and Over

I.R. 2022-217

Individuals born in 1950 or earlier must begin taking Required Minimum Distributions ("RMDs"). Under current

[Page 62]

law, people who turned 72 in calendar year 2022 may be affected by having to take RMDs beginning in tax year 2023.

The RMD rules require holders of a traditional Individual Retirement Account ("IRA"), DEP, SARSEP, and SIMPLE IRA to begin taking RMDs, even if they are still working. Thus, such account holders who turned 72 in 2022, must take their first RMD by April 1, 2023, and the second RMD by December 31, 2023, and then each year thereafter.

For holders of a 401(k), 403(b), 457(b), profit sharing, and other defined contribution and defined benefits plans, the first RMD is due by April 1st of the year: (a) after the year they reach 72; or (b) if younger than 72, the participant is no longer employed (if allowed by the plan).

Note: RMDs are taxable income and may be subject to penalties, if not timely taken. Moreover, RMDs may not be rolled over to another IRS or retirement plan.

D. 60-Day IRA Rollover Waiver if Defrauded

PLR 202244029

The IRS granted a taxpayer, who had been the victim of fraud, an extension of time beyond the standard 60-day deadline under IRC, section 408(d)(3) to complete a rollover of her IRA funds. Absent such an extension, the taxpayer would have had recognized gross income. However, the IRS can waive the 60-day rollover requirement where the failure to waive it would be contrary to equity or good conscience, in circumstances including casualty, disaster, or events beyond the reasonable control of the individual. Taxpayers can obtain a private letter ruling to this effect under Rev. Proc. 2003-16. Here, the taxpayer being the victim of a fraud scheme was sufficient to receive a favorable ruling that provided an additional 60 days from the issuance of the letter ruling to accomplish the necessary role over.

E. IRS, Treasury Dept. 2022-2023 Priority Guidance Plan

IRS PUBLISHES 2022-2023 PRIORITY GUIDANCE PLAN, 11/9/2022 FTWA

The IRS' most recent Priority Guidance plan articulates 205 priorities, 60 of them new as of this iteration, reflecting targeted projects for the 12-month period from July 1, 2022, through June 30, 2023. Of particular interest in the area of Gifts, Estates, and Trusts, are the following:

• final regulations under IRC, sectioins 1014(f) & 6035 regarding basis consistency between estate and person acquiring property from decedent;
• guidance on portability regulatory elections under IRC, section 2010(c)(5)(A);
• regulations under IRC, section 2032(a) regarding imposition of restrictions on estate assets during the six-month alternate valuation period;
• final regulations under IRC, section 2053 regarding the...