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  • Touch the lives of others while creating a lasting legacy
  • Find peace of mind through a wide variety of tax benefits
  • Help us achieve our goals for current and future generations
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Tuesday July 27, 2021

Washington News

Washington Hotline

8.8 Million Unclaimed Stimulus Payments

On September 17, 2020, the IRS published IR–2020–214 and explained the state–by–state breakdown of approximately 8.8 million people who have not yet received an Economic Impact Payment.

The IRS is mailing letters in English and Spanish to all of these individuals. It urges recipients to go to before October 15, 2020 and use the "Non–Filers: Enter Payment Info Here" tool to register for an Economic Impact Payment.

IRS Commissioner Chuck Rettig stated, "The IRS continues to work hard to reach people eligible for these payments. These mailings are the latest step by the IRS to reach as many people as possible for these important payments. We are releasing this state–by–state information so that state and local leaders and organizations can better understand the size of this population in their communities and assist them in claiming these important payments. Time is running out to claim a payment before the deadline."

The IRS has been engaged in a public awareness effort to encourage participation in the program by reaching out to nonprofit groups that serve different communities, the homeless and individuals whose primary language is not English. The final IRS letters are being sent to individuals who have not filed a tax return for 2018 or 2019. Most of these individuals have low incomes.

The individuals must qualify as U.S. citizens or resident aliens, have work-eligible Social Security numbers and may not be claimed as dependents on another person's federal income tax return. Qualified individuals may each receive up to $1,200, while married couples may qualify for up to $2,400. Individuals with qualifying children under age 17 may receive an additional $500 per child.

If an individual is qualified and misses the October 15 deadline, it is still possible to claim the stimulus amount on a tax return filed for tax year 2020. The stimulus qualification does have one limit - if a person is eligible for the Earned Income Tax Credit or Child Tax Credit, he or she must file a tax return.

Former National Taxpayer Advocate Nina Olson stated, "But the target audience is not really the tax professional community. It is the community groups who provide assistance to this low–income population and towns and cities with these populations."

Olson concluded, "Getting this information out is good. The real work will be done by the nonprofits and community-based organizations, including those [volunteer income tax assistance sites] that are up and running still."

The five states with the largest number of potential recipients are: California with 1,186,896, Texas with 796,525, Florida with 567,425, New York with 537,726, Georgia with 348,631 and Illinois with 309,972.

Closed Nonprofit Capital Losses Not Deductible

In Clinton Deckard v. Commissioner; No. 11859-17; 155 T.C. No. 8 (2020), the Tax Court ruled that the founder of a nonprofit could not later elect Subchapter S status and deduct the initial losses.

Waterfront Fashion Week, Inc. (Waterfront) was organized in 2012 as a Kentucky nonprofit corporation. The purpose of Waterfront was to "Provide economic development opportunities for various local, regional, and national fashion industry designers, to provide a platform for women to embrace their own personal styles and explore new style avenues and to enhance the quality of life and the economic vitality, all in partnership with government and private business concerns."

The nonprofit was organized "exclusively for charitable and educational purposes." If it were dissolved, any of the assets must be distributed "to (i) one or more exempt purposes that are consistent with the exempt purposes of the Organization and within the meaning of Section 501(c)(3) of the Code."

Waterfront produced Waterfront Fashion Week and was intended to benefit the Louisville Waterfront Development Corporation, a nonprofit entity. Waterfront was unable to obtain sufficient sponsors and did not transfer any funds to the Waterfront Development Corporation.

In 2014, the Kentucky Secretary of State administratively dissolved Waterfront. Waterfront then filed IRS Form 2553, Election by a Small Business Corporation, and claimed it was a Subchapter S corporation, retroactive to May 8, 2012. It filed untimely 2012 and 2013 Forms 1120S, U.S. Income Tax Return for an S Corporation. It reported nonpassive losses from Waterfront of $277,967 and $3,239. The IRS disallowed the claimed deductions.

The Tax Court noted the petitioner was not a shareholder of record. However, he claimed he was the "sole decision maker" and therefore held beneficial ownership.

The question of ownership of the nonprofit is a matter of Kentucky law. The Tax Court noted, "Nonprofit corporations are not generally considered to have owners." The Court continued, "The reason nonprofit corporations are not generally considered to have owners is that they are prohibited from distributing profits to insiders who are in positions to exercise control, such as members, officers or directors." Kentucky law prohibited a nonprofit corporation from paying a dividend and also stated the corporation "shall not have or issue shares of stock."

Because the nonprofit could not issue shares of stock under Kentucky law, the petitioner was not an owner and therefore not qualified to deduct passthrough losses.

However, the petitioner claimed he "objectively operated" the entity and therefore should be able to qualify. The Tax Court noted, "Taxpayers are generally bound by the form of the transaction they choose."

Waterfront was founded as a nonprofit. Even though it did not seek federal tax–exempt status, the taxpayer is bound by the choice of entity. The passthrough deductions were denied.

Editor's Note: This case shows that some functions are not properly engaged in by nonprofit entities. This was an inherently commercial process to enlist sponsors in a business enterprise.

Bipartisan COVID-19 Compromise Offer in House

The 50–member Problem Solvers Caucus is a bipartisan group of House Members. It met recently and, in recognition of the impasse in negotiations among Senate and House leaders, proposed a compromise COVID-19 relief solution that would cost $1.5 trillion.

The caucus agreed on several provisions. First, there should be another round of PPP funding. The caucus proposal is similar to the one created by Republican Senators Marco Rubio (R-FL) and Susan M. Collins (R-ME). The additional $240 billion of Paycheck Protection Program (PPP) funding would fund loans to businesses with dramatic reductions in revenue. $50 billion would also be added to the small business loan program.

Second, the compromise envisions another round of stimulus checks. Individuals could receive $1,200, couples may qualify for $2,400 and qualifying children an additional $500. The plan would pay only to those with a Social Security number.

Democratic leaders stated the $1.5 trillion plan is not sufficient and continue to prefer the $3 trillion Health and Economic Recovery, Omnibus Emergency Solutions Act.

Both House and Senate Members have continued to seek to pass a deduction for PPP expenses. House Ways and Means Committee Chair Richard Neal (D–MA) reported that he has been in conversations with Treasury Secretary Mnuchin. Neal stated, "I have encouraged him to be very flexible and keep liquidity in the system."

Neal indicated that the PPP deduction may potentially pass after the election. He commented "I think a better picture will emerge once we get back after the elections."

Sen. John Cornyn (R–TX) introduced Senate legislation to make the PPP amounts deductible. He stated, "We will keep at it until it is done."

Applicable Federal Rate of 0.4% for October -- Rev. Rul. 2020-20; 2020-41 IRB 1 (16 September 2020)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2020. The AFR under Section 7520 for the month of October is 0.4%. The rates for September of 0.4% or August of 0.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2020, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.

Published September 18, 2020
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