Taxpayers received about $659 million in refunds during fiscal year 2023, representing a 2.7 percent increase in the amount of refunded to taxpayers in the previous fiscal year.

Taxpayers received about $659 million in refunds during fiscal year 2023, representing a 2.7 percent increase in the amount of refunded to taxpayers in the previous fiscal year.

The refunds were on nearly $4.7 trillion in gross revenues collected by the Internal Revenue Service, which represents about 96 percent of the funding that supports federal government operations, the agency reported in its annual Data Book for fiscal year 2023, which was released April 18, 2024. This is down from more than $4.9 trillion in gross tax revenues in FY 2022.

Business income taxes declined in 2023 to nearly $457 billion in FY 2023 from nearly $476 billion in the previous fiscal year. Individual and estate and trust income taxes declined to nearly $2.6 trillion from just over $2.9 trillion. Employment taxes, estate and trust taxes, and excise and gift taxes all grew fiscal year-over-year.

More than 271.4 million tax returns and other forms were processed during FY 2023, the IRS reported. Of those, 163.1 million were individual tax returns. The report describes the 2023 filing season as "successful".

Paid prepared filed more than 84 million individual tax returns electronically, and taxpayers file nearly 2.9 million returns using the IRS Free File program, the agency reported.

The Taxpayer Advocate Service reported it resolved 219,251 cases in FY 2023. The top five case types included:

• Processing amended returns (36,171)
• Pre-refund wage verification hold (26,052)
• Decedent account refunds (12,695)
• Identity theft (11,915)
• Earned Income Tax Credit (10,507)

On the compliance side, the IRS reported that for all returns from tax years 2013 through 2021, it examined 0.44 percent of individual returns filed and 0.74 percent of corporate returns filed. Additionally, the agency examined 8.7 percent of taxpayers filing individual returns reporting total positive income of $10 million or more. Isolating tax year 2019 (the most recent year outside the statute of limitations period), the examination rate was 11.0 percent.

In FY 2023, the IRS said it "closed 582,944 tax return audits, resulting in $31.9 billion in recommended additional tax." Additionally, the agency “completed 2,584 criminal investigations” across three areas:

• 1,052 illegal-source financial crimes cases
• 979 legal-source tax crime cases
• 553 narcotics-related financial crimes cases

On the collections side, the IRS in FY 2024 collected more than $104.1 billion in unpaid assessments on returns filed with additional tax due, netting about $68.3 billion after credit transfers. It also assessed more than $25.6 billion in additional taxes for returns not filed timely and collected nearly $2.8 billion with delinquent returns.

By Gregory Twachtman, Washington News Editor

IR-2024-115

The IRS announced that final regulations related to required minimum distributions (RMDs) under Code Sec. 401(a)(9) will apply no earlier than the 2025 distribution calendar year. In addition, the IRS has provided transition relief for 2024 for certain distributions made to designated beneficiaries under the 10-year rule. The transition relief extends similar relief granted in 2021, 2022, and 2023.

The IRS announced that final regulations related to required minimum distributions (RMDs) under Code Sec. 401(a)(9) will apply no earlier than the 2025 distribution calendar year. In addition, the IRS has provided transition relief for 2024 for certain distributions made to designated beneficiaries under the 10-year rule. The transition relief extends similar relief granted in 2021, 2022, and 2023.

SECURE Act Changes

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) (P.L. 116-94) changed the RMD rules for employees and IRA owners who died after December 31, 2019. Under Code Sec. 401(a)(9)(H)(i), if an employee in a defined contribution plan or IRA owner has a designated beneficiary, the 5-year distribution period has been lengthened to 10 years, and the 10-year rule applies regardless of whether the employee dies before the required beginning date. Proposed regulations would interpret the 10-year rule to require the beneficiary of an employee who died after his required beginning date to continue to take an annual RMD beginning in the first calendar year after the employee’s death. This aspect of the 10-year rule differs from the 5-year rule, which required no RMD until the end of the 5-year period. Thus, the IRS provided transition relief for 2021, 2022, and 2023.

Guidance for Specified RMDs for 2024

Under the transition guidance, a defined contribution plan will not be treated as having failed to satisfyCode Sec. 401(a)(9) for failing to make an RMD in 2024 that would have been required under the proposed regulations. The relief also applies to an individual who would have been liable for an excise tax under Code Sec. 4974. The guidance applies to any distribution that, under the interpretation included in the proposed regulations, would be required to be made under Code Sec. 401(a)(9) in 2024 under a defined contribution plan or IRA that is subject to the rules of Code Sec. 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:

• a designated beneficiary of an employee or IRA owner under the plan if the employee or IRA owner died in 2020, 2021, 2022 or 2023, and on or after the employee’s (or IRA owner’s) required beginning date and the designated beneficiary is not using the lifetime or life expectancy payments exception under Code Sec. 401(a)(9)(B)(iii); or
• a beneficiary of an eligible designated beneficiary if the eligible designated beneficiary died in 2020, 2021, 2022, or 2023, and that eligible designated beneficiary was using the lifetime or life expectancy payments exception under Code Sec. 401(a)(9)(B)(iii).

Applicability Date of Final Regulations

The IRS has announced that final regulations regarding RMDs under Code Sec. 401(a)(9) and related provisions are anticipated to apply for determining RMDs for calendar years beginning on or after January 1, 2025.

Notice 2024-35

The IRS, in connection with other agencies, have issued final rules amending the definition of "short term, limited duration insurance" (STLDI), and adding a notice requirement to fixed indemnity excepted benefits coverage, in an effort to better distinguish the two from comprehensive coverage.

The IRS, in connection with other agencies, have issued final rules amending the definition of "short term, limited duration insurance" (STLDI), and adding a notice requirement to fixed indemnity excepted benefits coverage, in an effort to better distinguish the two from comprehensive coverage.

Comprehensive coverage is health insurance which is subject to certain federal consumer protections. Both STLDI and fixed indemnity excepted benefits coverage generally provide limited benefits at lower premiums than comprehensive coverage, and enrollment is typically available at any time rather than being restricted to open and special enrollment periods. However, the government is concerned about the financial and health risks that consumers face if they use either form of coverage as a substitute for comprehensive coverage, particularly as a long-term substitute. Consumers who do not understand key differences between STLDI, fixed indemnity excepted benefits coverage, and comprehensive coverage may unknowingly take on significant financial and health risks if they purchase STLDI or fixed indemnity excepted benefits coverage under the misunderstanding that such products provide comprehensive coverage.

The Definition of STLDI

STLDI is a type of health insurance coverage sold by health insurance issuers that is primarily designed to fill temporary gaps in coverage that may occur when an individual is transitioning from one plan or coverage to another (for example, due to application of a waiting period for employer coverage). Because STLDI falls outside of "individual health insurance coverage," it is generally exempt from the Federal individual market consumer protections and requirements for comprehensive coverage. This can be an issue because individuals who enroll in STLDI are often not aware that they will not be guaranteed these key consumer protections.

Under the definition in the final rules, STLDI is health insurance coverage provided pursuant to a policy, certificate, or contract of insurance that has an expiration date specified in the policy, certificate, or contract of insurance that is no more than three months after the original effective date of the policy, certificate, or contract of insurance, and taking into account any renewals or extensions, has a duration no longer than four months in total. For purposes of this definition, a renewal or extension includes the term of a new STLDI policy, certificate, or contract of insurance issued by the same issuer to the same policyholder within the 12-month period beginning on the original effective date of the initial policy, certificate, or contract of insurance.

STLDI issuers must display a notice on the first page (in either paper or electronic form, including on a website) of the policy, certificate, or contract of insurance, and in any marketing, application, and enrollment materials (including reenrollment materials) provided to individuals at or before the time an individual has the opportunity to enroll or reenroll in the coverage, in at least 14-point font. A sample notice has been provided by the agencies.

Fixed Indemnity Insurance

Federal consumer protections and requirements for comprehensive coverage do not apply to any individual coverage or any group health plan in relation to its provision of certain types of benefits, known as "excepted benefits." Like other forms of excepted benefits, fixed indemnity excepted benefits coverage does not provide comprehensive coverage. Rather, its primary purpose is to provide income replacement benefits. Benefits under this type of coverage are paid in a fixed cash amount following the occurrence of a health-related event, such as a period of hospitalization or illness. In addition, benefits are provided at a pre-determined level regardless of any health care costs incurred by a covered individual with respect to the health-related event. Although a benefit payment may equal all or a portion of the cost of care related to an event, it is not necessarily designed to do so, and the benefit payment is made without regard to the amount of health care costs incurred.

In an effort to give consumers an informed choice, the final rules adopt the requirement of a consumer notice that must be provided when offering fixed indemnity excepted benefits coverage in the group market and update the existing notice for such coverage offered in the individual market. The final rule does not address any other provision of the 2023 proposed rules (NPRM REG-120730-21) relating to fixed indemnity excepted benefits coverage.

Effective Date

The final rules apply to new STLDI policies sold or issued on or after September 1, 2024. For fixed indemnity coverage, plans and issuers will be required to comply with the notice provisions for plan years (in the individual market, coverage periods) beginning on or after January 1, 2025.

NPRM REG-120730-21 is modified.

T.D. 9990

The Tax Court has ruled against the IRS's denial of a conservation easement deduction by declaring a Treasury regulation to be invalid under the enactment requirements of the Administrative Procedure Act (APA).

The Tax Court has ruled against the IRS's denial of a conservation easement deduction by declaring a Treasury regulation to be invalid under the enactment requirements of the Administrative Procedure Act (APA).

An LLC conveyed a conservation easement of land to a foundation that was properly registered with the county clerk. The deed conveyed the easement in perpetuity, allowing for extinguishment only in cases where the conservation purposes became impossible to accomplish or if the property were to be condemned by the local government through eminent domain. The LLC then timely filed Form 1065, U.S. Return of Partnership Income, claiming a $14.8 million deduction under Code Sec. 170(h) for conveyance of the easement, and included with the return Form 8283, Noncash Charitable Contributions.

The IRS disallowed the deduction stating the conservation purpose of the easement was not "protected in perpetuity" as required by Code Sec. 170(h)(5)(A) and, specifically, by operation of Reg. § 1.170A-14(g)(6)(ii). The LLC contended that Reg. § 1.170A-14(g)(6)(ii) is procedurally invalid under the APA and that the deed therefore need not comply with its requirements.

The Tax Court decided to reverse its prior position regarding the validity of this regulation in Oakbrook Land Holdings, LLC, (154 TC 180, Dec. 61,663; aff’d, CA-6, 2022-1 USTC ¶50,128). Despite the fact the Sixth Circuit affirmed this earlier opinion, the Eleventh Circuit had reversed the Tax Court on the same issue. This case is situated in the Tenth Circuit, which had not ruled on this issue.

The Tax Court agreed with the LLC’s argument that Reg. § 1.170A14(g)(6)(ii) is invalid because the concerns expressed in significant comments filed during the rulemaking process were inadequately responded to by the Treasury Department in the final regulation’s "basis and purpose" statement, in violation of the APA’s procedural requirements.

Four judges dissented, arguing there is no substantial basis for reversing their opinion of only four years prior, and that invalidating a regulation for failing to include a statement of basis and purpose should not occur when the basis and purpose are "obvious."

Valley Park Ranch, LLC, 162 TC —, No. 6, Dec. 62,442

For purposes of the energy investment credit, the IRS released 2024 application and allocation procedures for the environmental justice solar and wind capacity limitation under the low-income communities bonus credit program. Many of the procedures reiterate the rules in Reg. §1.48(e)-1 and Rev. Proc. 2023-27, but some special rules are also provided.

For purposes of the energy investment credit, the IRS released 2024 application and allocation procedures for the environmental justice solar and wind capacity limitation under the low-income communities bonus credit program. Many of the procedures reiterate the rules in Reg. §1.48(e)-1 and Rev. Proc. 2023-27, but some special rules are also provided.

The guidance superseded Rev. Proc. 2023-27 for the 2024 program year only.

Submitting an Application

The IRS will publicly announce the opening and closing dates for the 2024 Program year application period on the Department of Energy (DOE) landing page for the Program (Program Homepage) at https://www.energy.gov/justice/low-income-communities-bonus-credit-program. DOE will not accept new application submissions for the 2024 Program year after 11:59 PM ET on the date the application period closes. The owner of the solar or wind facility is the person who must apply for an allocation and is the recipient of any awarded allocation.

An applicant must apply for an allocation of Capacity Limitation through DOE online Program portal system (Portal) at https://eco.energy.gov/ejbonus/s/. Applicants must register in the Portal before they can begin the application process; and they must create a login.gov account before accessing the Portal. The Program Homepage includes an Applicant User Guide.

Identifying Category and Sub-Reservation

In addition to the other information detailed below, the application must identify the relevant facility category:

• -- Category 1: Project Located in a Low-Income Community (and the application must also specify whether the facility is a behind the meter (BTM) or front of the meter (FTM) facility),
• -- Category 2: Project Located on Indian Land,
• -- Category 3: Qualified Low-Income Residential Building Project, or
• -- Category 4: Qualified Low-Income Economic Benefit Project.

An applicant may submit only one application for the 2024 program year. Thus, if an applicant wishes to change its chosen category (or its Category 1 sub-reservation), it must withdraw its first application and submit a second one. Otherwise, any application submitted after the first application is treated as a duplicate application.

Application Contents

The application must contain all required information, documentation, and attestations submitted under penalties of perjury by a person who has personal knowledge of the relevant facts. That person must also be legally authorized to bind the applicant entity for federal income tax purposes, to communicate with DOE about the application, and to receive notifications, letters, and other communications from DOE and the IRS.

The guidance details the required information regarding the applicant and the facility, as well as the required documentation. The guidance also describes the information that must be submitted if an applicant wants to be considered under the additional ownership criteria or the additional geographic criteria. The DOE may require additional information in its publicly available written procedures.

DOE Review and Selection

DOE will review applications and provide a recommendation to the IRS. If the DOE identifies an error in the application, such as missing or incorrect information or documentation, it will notify the applicant through the Portal. The applicant will have 12 business days to correct the information; otherwise, DOE will treat the application as withdrawn.

Once the application period opens for the 2024 Program year, all applications submitted during the first 30 days are treated as submitted at the same time. DOE will publicly announce on the Program Homepage the opening and closing dates of this 30-day period. If applications during this period exhaust the available allocation for a category, DOE will conduct an allocation lottery. After the 30-day period, DOE will review applications in the order they are submitted until the available capacity in the identified category is allocated.

Receiving an Allocation and Claiming the Bonus Credit

After the IRS receives the DOE recommendation, it will award an allocation or reject the application. The IRS will send final decision letters through the Portal, which will identify the amount of any allocation awarded. However, an allocation is not a final determination that the facility is eligible for the bonus credit.

The owner of a facility that receives an allocation must use the Portal to report the date the facility is placed in service. The guidance details the additional information the owner must provide with the notification. After the facility is placed in service, and the owner submits the additional documentation and attestations, the owner is notified that it may claim the bonus credit.

After the IRS awards all the Capacity Limitation within each facility category, or the 2024 Program year is closed, DOE will stop reviewing applications. At the end of the 2024 Program year, no further action will be taken on applications that were not awarded an allocation. DOE will publicly announce on the Program Homepage when the 2024 Program year closes.

Effect on Other Documents

Rev. Proc. 2023-27, I.R.B. 2023-35, 655, is superseded solely with respect to the 2024 program year.

IR-2024-86

Rev. Proc. 2024-19

The IRS has provided a limited waiver of the addition to tax under Code Sec. 6655 for underpayments of estimated income tax related to application of the corporate alternative minimum tax (CAMT), as amended by the Inflation Reduction Act (P.L. 117-169).

The IRS has provided a limited waiver of the addition to tax under Code Sec. 6655 for underpayments of estimated income tax related to application of the corporate alternative minimum tax (CAMT), as amended by the Inflation Reduction Act (P.L. 117-169).

The Inflation Reduction Act added a new corporate AMT under Code Sec. 55, beginning after December 31, 2022, based on a corporation's adjusted financial statement income. Code Sec. 6655 generally requires corporations to pay estimated income taxes quarterly, with an addition to tax for failure to make sufficient and timely payments. The quarterly estimated tax payments must add up to 100 percent of the income tax due.

Estimated Taxes

The IRS waived the addition to tax under Code Sec. 6655 that is attributable to a corporation’s CAMT liability for the installment of estimated tax that is due on or before April 15, 2024, or May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024). Accordingly, a corporate taxpayer’s required installment of estimated tax that is due on or before April 15, 2024, or on or before May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024), need not include amounts attributable to its CAMT liability under Code Sec. 55 to prevent the imposition of an addition to tax under Code Sec. 6655. However, if a corporation fails to pay its CAMT liability, other Code sections may apply. For instance, additions to tax under Code Sec. 6651 could be imposed.

Instructions to Form 2220

The instructions to Form 2220, Underpayment of Estimated Tax by Corporations, will be modified to clarify that no addition to tax will be imposed under Code Sec. 6655 based on a corporation’s failure to make estimated tax payments of its CAMT liability for any covered CAMT year. Taxpayers may exclude such amounts when calculating the amount of its required annual payment on Form 2220. Affected taxpayers must still file Form 2220 with their income tax return, even if they owe no estimated tax penalty.

Applicability Date

The waiver of the addition to tax imposed by Code Sec. 6655 applies to the installment of estimated tax that is due on or before April 15, 2024, or on or before May 15, 2024 (in the case of a fiscal year taxpayer with a taxable year beginning in February 2024).

The IRS has issued proposed regulations that would provide guidance on the application of the new excise tax on repurchases of corporate stock made after December 31, 2022 (NPRM REG-115710-22). Another set of proposed rules would provide guidance on the procedure and administration for the excise tax (NPRM REG-118499-23).

The IRS has issued proposed regulations that would provide guidance on the application of the new excise tax on repurchases of corporate stock made after December 31, 2022 (NPRM REG-115710-22). Another set of proposed rules would provide guidance on the procedure and administration for the excise tax (NPRM REG-118499-23).

Code Sec. 4501 and IRS Guidance

Beginning in 2023, Code Sec. 4501 subjects a covered corporation to an excise tax equal to one percent of the fair market value of its stock that is repurchased by the corporation during the tax year. A covered corporation for this purpose is any domestic corporation the stock of which is traded on an established securities market.

Repurchase includes stock redemptions and economically similar transactions as determined by the IRS. The amount of repurchase subject to the tax is reduced by the value of new stock issued to the public or employees during the year. Repurchase of the covered corporation’s stock by its specified affiliate (a more-than-50-percent owned domestic subsidiary or partnership) also subjects the covered corporation to the excise tax.

The excise tax does not apply if the total amount of stock repurchases during the year is less than $1 million and in certain other situations.

Notice 2023-2, 2023-3 I.R.B. 374, provides initial guidance regarding the application of the excise tax. It describes rules expected to be provided in forthcoming proposed regulations for determining the amount of stock repurchase excise tax owed, along with anticipated rules for reporting and paying any liability for the tax.

Proposed Operative Rules under Code Sec. 4501 (NPRM REG-115710-22)

The proposed regulations would provide general rules regarding the application and computation of the stock repurchase excise tax, the statutory exceptions, and the application of Code Sec. 4501(d). Specifically, the proposed regulations would provide guidance addressing the following:

• Certain issues related to the effective date and transition relief, including:
  • repurchases before January 1, 2023, are not taken into account for purposes of applying the de minimis exception;
  • in the case of a covered corporation that has a tax year that both begins before January 1, 2023, and ends after December 31, 2022, that covered corporation may apply the netting rule to reduce the fair market value of the covered corporation’s repurchases during that tax year by the fair market value of all issuances of its stock during the entirety of that tax year;
  • contributions to an employer-sponsored retirement plan during the 2022 portion of a tax year beginning before January 1, 2023, and ending after December 31, 2022, should be taken into account for purposes of Code Sec. 4501(e)(2);
  • the date of repurchase for a regular-way sale of stock on an established securities market is the trade date.
• Definition of stock and the application of the excise tax to various types of stock, options, and financial instruments. The proposed regulations generally would maintain the definition of "stock" from Notice 2023-2, but would exclude "additional tier 1 preferred stock"; therefore, unless the limited-scope exception regarding additional tier 1 preferred stock applies, the stock repurchase excise tax would apply to preferred stock in the same manner as to common stock.
• Rules for valuation of stock. Generally, the proposed regulations would adopt the valuation approach of Notice 2023-2 that the fair market value of stock repurchased or issued is the market price of the stock on the date the stock is repurchased or issued, respectively.
• Rules for timing of issuances and repurchases. The approach that stock generally should be treated as repurchased when tax ownership of the stock transfers to the covered corporation or to the specified affiliate (as appropriate) would generally be retained.
• Rules regarding becoming or ceasing to be a covered corporation and determining specified affiliate status.
• Rules regarding Code Sec. 301 distributions, and complete and partial liquidations.
• Treatment of taxable transactions, including LBOs and other taxable "take private" transactions.
• Treatment of Code Sec. 304 transactions, reorganizations, and Code Sec. 355 transactions.
• Application of the statutory exceptions, including repurchase as part of a reorganization, contributions to employer-sponsored retirement plans, the de minimis exception, repurchases by dealers in securities, repurchases by RICs and REITs, and the dividend exception.
• Application of the netting rule (the adjustment for stock issued by a covered corporation, including stock issued or provided to employees of a covered corporation or its specified affiliate).
• Considerations for mergers and acquisitions with post-closing price adjustments and troubled companies.
• Application of Code Sec. 4501(d).

Applicability Dates of Proposed Operative Rules

The proposed regulations, other than the proposed regulations under Code Sec. 4501(d), would generally apply to repurchases of stock of a covered corporation occurring after December 31, 2022, and during tax years ending after December 31, 2022, and to issuances and provisions of stock of a covered corporation occurring during tax years ending after December 31, 2022. However, certain rules that were not described in Notice 2023-2 would apply to repurchases, issuances, or provisions of stock of a covered corporation occurring after April 12, 2024, and during tax years ending after April 12, 2024.

Except as described below, so long as a covered corporation consistently follows the provisions of the proposed regulations, the covered corporation may rely on these proposed regulations with respect to (1) repurchases of stock of the covered corporation occurring after December 31, 2022, and on or before the date of publication of final regulations in the Federal Register, and (2) issuances and provisions of stock of the covered corporation occurring during tax years ending after December 31, 2022, and on or before the date of publication of final regulations in the Federal Register.

In addition, so long as a covered corporation consistently follows the provisions of Notice 2023-2 corresponding to the rules in the proposed regulations, the covered corporation may choose to rely on Notice 2023-2 with respect to (1) repurchases of stock of a covered corporation occurring after December 31, 2022, and on or before April 12, 2024, and (2) issuances and provisions of stock of a covered corporation occurring during taxable years ending after December 31, 2022, and on or before April 12, 2024.

A covered corporation that relies on the provisions of Notice 2023-2 corresponding to the proposed rules with respect to (1) repurchases occurring after December 31, 2022, and on or before April 12, 2024, and (2) issuances and provisions of stock of a covered corporation occurring during tax years ending after December 31, 2022, and on or before April 12, 2024, may also choose to rely on the provisions of the proposed regulations with respect to (1) repurchases occurring after April 12, 2024, and on or before the date of publication of final regulations in the Federal Register, and (2) issuances and provisions of stock of a covered corporation occurring after April 12, 2024, and on or before the date of publication of final regulations in the Federal Register.

Special applicability dates are provided for the proposed rules under Code Sec. 4501(d).

Rules Regarding Procedure and Administration (NPRM REG-118499-23)

The IRS has also proposed regulations with guidance on the manner and method of reporting and paying the stock repurchase excise tax. These proposed regulations provide requirements for return and recordkeeping, the time and place for filing the return and paying the tax, and tax return preparers.

Consistent with Notice 2023-2, the proposed regulations add rules on procedure and administration in proposed subpart B of the proposed Stock Repurchase Excise Tax Regulations (26 CFR part 58) under Code Secs. 6001, 6011, 6060, 6061, 6065, 6071, 6091, 6107, 6109, 6151, 6694, 6695, and 6696.

In addition to requiring the excise tax to be reported on IRS Form 720, Quarterly Federal Excise Tax Return, the proposed regulations include items relevant to tax forms other than Form 720 (such as Form 1120, U.S. Corporation Income Tax Return, and Form 1065, U.S. Return of Partnership Income) to assist in identifying transactions subject to the tax.

Applicability Date of Proposed Procedural Rules

Proposed Reg. §58.6001-1 would be applicable to repurchases, adjustments, or exceptions required to be shown in any stock repurchase excise tax return required to be filed after the date of publication of final regulations in the Federal Register.

The rest of the proposed regulations would be applicable to stock repurchase excise tax returns and claims for refund required to be filed after the date of publication of final regulations in the Federal Register.

Effect on Other Documents

Notice 2023-2, 2023-3 I.R.B. 374, is obsoleted for repurchases, issuances, and provisions of stock of a covered corporation occurring after April 12, 2024.

Requests for Comments

Written or electronic comments and requests for a public hearing with respect to the proposed operative rules must be received by the date that is 60 days after April 12, 2024, the date of publication in the Federal Register. Comments and requests for a public hearing on the proposed procedural rules must be received by the date that is 30 days after publication in the Federal Register.

Stock options have become a common part of many compensation and benefits packages. Even small businesses have jumped on the bandwagon and now provide a perk previously confined to the executive suites of large publicly held companies. If you are an employee who has received stock options, you need to be aware of the complicated tax rules that govern certain stock options -- several potential "gotchas" exist and failing to spot them can cause major tax headaches.

Stock options have become a common part of many compensation and benefits packages. Even small businesses have jumped on the bandwagon and now provide a perk previously confined to the executive suites of large publicly held companies. If you are an employee who has received stock options, you need to be aware of the complicated tax rules that govern certain stock options -- several potential "gotchas" exist and failing to spot them can cause major tax headaches.

Over the past few years, the rules governing stock options have become increasingly complicated. More than ever, it is important that employees who receive stock options have a good understanding about how they are taxed -- on receipt of the option, at its exercise, or pursuant to the sale of the underlying stock -- as well as the potential consequences of their decisions regarding the timing of the taxation of those options.

NSOs vs ISOs

The most common type of stock option that employees receive is called a nonstatutory stock option (NSO). The other, less common type of stock option is generically referred to as an incentive stock option (ISO). ISOs are governed by very specific rules and are subjected to strict statutory requirements; NSOs, on the other hand, are subject to more general rules and guidelines.

Incentive stock options (ISOs) give the employee the right to purchase stock from the employer at a specified price. The employee is not taxed on the ISO at the time of its grant or at the time of the exercise of the option. Instead, he or she is taxed only at the time of the disposition of the stock acquired through exercise of the option. Note, however, the exercise of an ISO does give rise to an alternative minimum tax item in the amount of the difference between the option price and the market price of the stock.

Note. The IRS temporarily suspended the collection of ISO alternative minimum tax (AMT) liabilities through September 30, 2008.

NSOs also give the employee the right to purchase stock from the employer at a specified price. When and how an NSO is taxed depends on several factors including whether the underlying stock is substantially vested, and whether or not the fair market value of the stock is readily ascertainable.

Vesting. If an employee receives options from his employer, the tax consequences depend on whether the stock is vested. Stock you receive from your employer is "substantially vested" if it is either "transferable" by the employee or it is no longer subject to a "substantial risk of forfeiture". Property is "transferable" if you can sell, assign or pledge your interest in the option without the risk of losing it. A "substantial risk of forfeiture" exists if the rights in the property transferred depend on the future performance (or refraining from performance) of substantial services by any person, or the occurrence of a certain condition related to the transfer.

Readily ascertainable fair market value. An NSO always has a readily ascertainable fair market value when the option is publicly traded. When an option is not publicly traded, it can have a readily ascertainable fair market value if its value can be measured with reasonable accuracy. IRS rules spell out when fair market value can be measured with reasonable accuracy.

Generally, an employee who receives an NSO that has a readily ascertainable fair market value is subject to special tax rules under the Internal Revenue Code that apply to property received by a taxpayer in exchange for services when the option is granted. Under these rules, the option must be included in the employee's income as ordinary income in the amount of the fair market value in the year the option becomes substantially vested. If the employee paid for the option, he recognizes the value of the option minus its cost. The employee is not taxed again when he exercises the option and buys the corporate stock; he is taxed when the stock is sold. The gain or loss recognized when the employee sells the stock is capital in nature.

No readily ascertainable fair market value. Employees who receive NSOs from privately held companies are most likely to receive an NSO without a readily ascertainable fair market value. In general, when an NSO does not have a readily ascertainable fair market value, taxation occurs at the time when the option is exercised or transferred. The employee will recognize ordinary income in the amount of the value of the stock when it becomes substantially vested minus any amounts paid for the option or stock. The gain or loss recognized when the employee sells the stock is capital in nature. However, employees who have NSOs without a readily ascertainable fair market value also have the ability to elect to have the transaction taxed differently,

Section 83(b) election: Elector beware

Employees who exercise options that did not have a readily ascertainable fair market value when they were granted may elect to report income from the stock underlying the option at the time of the exercise rather than waiting until the stock is substantially vested. This election is referred to as a "Section 83(b) election" and is non-revocable. Once the election is made, any later subsequent appreciation when the stock becomes substantially vested would not be includible in income.

As you can see, the rules and tax laws related to stock options are indeed complicated and require some advance planning in order to avoid a big tax "gotcha". If you are contemplating entering into any transactions that involve stock options, please contact the office for additional guidance.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

In the event of a business owner's demise or retirement, the absence of a good business succession plan can endanger the financial stability of his business as well as the financial security of his family. With no plan to follow, many families are forced to scramble to outsiders to provide capital and acquire management expertise.

Here are some ideas to consider when you decided to begin the process of developing your business' succession plan:

Start today. Succession planning for the family-owned business is particularly difficult because not only does the founder have to address his own mortality, but he must also address issues that are specific to the family-owned business such as sibling rivalry, marital situations, and other family interactions. For these and other reasons, succession planning is easy to put off. But do you and your family a favor by starting the process as soon as possible to ensure a smooth, stress-free transition from one generation to the next.

Look at succession as a process. In the ideal situation, management succession would not take place at any one time in response to an event such as the death, disability or retirement of the founder, but would be a gradual process implemented over several years. Successful succession planning should include the planning, selection and preparation of the next generation of managers; a transition in management responsibility; gradual decrease in the role of the previous managers; and finally discontinuation of any input by the previous managers.

Choose needs over desires. Your foremost consideration should be the needs of the business rather than the desires of family members. Determine what the goals of the business are and what individual has the leadership skills and drive to reach them. Consider bringing in competent outside advisors and/or mediators to resolve any conflicts that may arise as a result of the business decisions you must make.

Be honest. Be honest in your appraisal of each family member's strengths and weaknesses. Whomever you choose as your successor (or part of the next management team), it is critical that a plan is developed early enough so these individuals can benefit from your (and the existing management team's) experience and knowledge.

Other considerations

A business succession plan should not only address management succession, but transfer of ownership and estate planning issues as well. Buy-sell agreements, stock gifting, trusts, and wills all have their place in the succession process and should be discussed with your professional advisors for integration into the plan.

Developing a sound business succession plan is a big step towards ensuring that your successful family-owned business doesn't become just another statistic. Please contact the office for more information and a consultation regarding how you should proceed with your business' succession plan.

As you open the doors of your new business, the last thing on your mind may be the potential for loss of profits through employee oversight or theft - especially if you are the only employee. However, setting up some basic internal controls to guard against future loss before you hire others can save you headaches in the future.

As you open the doors of your new business, the last thing on your mind may be the potential for loss of profits through employee oversight or theft - especially if you are the only employee. However, setting up some basic internal controls to guard against future loss before you hire others can save you headaches in the future.

Soon after you start making money and the world realizes that they cannot live without your goods or service, you will probably need to hire employees. Although necessary for your growing company, hiring employees increases your risk of loss through errors, oversights and theft.

Implementing internal controls to help you monitor your business can decrease the need for constant supervision of your employees. Internal controls are checks and balances to prevent fraud, limit financial losses and reduce errors or oversights by employees. For example, the most basic internal control concept requires that certain tasks be handled by different people. This process, called "separation of duties", can greatly decrease the probability of loss.

The following basic internal control checklist includes suggestions that, once implemented, can help you and your employees avoid concerns about fraud or theft in the workplace:

As your company grows, you may want to become less and less involved with the day-to-day operations of the business. The internal controls you put into place now will help keep the profits up, the losses down, and help you sleep better at night. If you need any assistance with setting up internal controls for you business, please feel free to contact our office.

The United States is currently experiencing the largest influx of inpatriates (foreign nationals working in the U.S.) in history. As the laws regarding United States taxation of foreign nationals can be quite complex, this article will answer the most commonly asked questions that an inpatriate may have concerning his/her U.S. tax liability and filing requirements.

The United States is currently experiencing the largest influx of inpatriates (foreign nationals working in the U.S.) in history. As the laws regarding United States taxation of foreign nationals can be quite complex, this article will answer the most commonly asked questions that an inpatriate may have concerning his/her U.S. tax liability and filing requirements.

I am a foreign national working in the United States and am paid by my foreign employer. Do I need to file a tax return and pay income taxes?

The general rule is that all wages earned while working in the United States, regardless of who pays for it or the locations of the employer, is taxable in the United States. This is true whether you are treated as a U.S. resident or not.

What is the difference in taxation of a resident alien versus a nonresident alien?

The difference in being taxed as a resident versus a nonresident is as follows: a resident alien is taxable in the U.S. on all worldwide income, regardless of what country it is earned or located in. A nonresident alien is generally taxable only on what is referred to as "effectively connected income". This is normally wages earned while in the U.S., along with earnings on property located in the United States. Certain deductions, exemptions, and filing statuses are not available to nonresidents.

I am not a resident for immigration purposes as I am here on a temporary visa. Can I still be a resident for U.S. tax purposes?

The determination of residency for tax purposes does not bear any relationship to your legal or immigration status. It is quite common for a foreign national to be a nonresident for legal or immigration purposes and yet be a resident for tax purposes. In addition, being a resident for income tax purposes can be different than being a resident for estate tax or even social security tax purposes. In some cases, it is actually more beneficial to be treated as a resident than as a nonresident. As a result, it is important to have all of the information we request in order to make the best decision for you.

How do you determine whether you are a resident or nonresident for U.S. income tax purposes?

As a foreign national working in the U.S., you must first determine if you are a "resident" for U.S. income tax purposes. There are two tests to determine whether you are a U.S. tax resident. These two tests are:

If you meet the requirements of either of these two tests, you will be treated as a U.S. tax resident (unless a treaty overrides this).

What is the difference between a lawful permanent resident and meeting the substantial presence test?

Lawful Permanent Resident Test - In its simplest form, this is when you have been issued a green card or alien registration card allowing for permanent residency.

Substantial Presence Test - This is a more complicated test that looks at the number of days of physical presence in the U.S. over a three-year period of time. If the number of days of U.S. presence exceeds 183 days in the current year, or 183 equivalent days during a three-year period, you are a resident for U.S. tax purposes. An "equivalent day" is defined as:

There are exceptions to the counting of days, but in general, any part of a day counts as a full day.

What if I meet the substantial presence test? Are there exceptions to allow me to be a nonresident anyway?

31 Day Exception - If you are present in the States for less than 31 days in the current year, the substantial presence test is not applied.

Closer Connections Exception - If you are present in the U.S. for fewer than 183 days in the current year AND you maintain a "tax home" in another country during the entire year AND you maintain a closer connection to the foreign country in which you have a tax home, then this test will not apply.

J-1 Visa - Subject to some limitations, you do not count days in the U.S., for calculating the substantial presence test, while you are here on a J-1 visa (generally for up to two years). This does not exempt the earnings, but just allows you to be treated as a nonresident alien, not a resident alien.

Treaty - Some countries have treaties with the U.S. which, in some cases, will override either the U.S. Internal Revenue Code or the income tax law of the foreign country.

If I become a U.S. taxable resident during the year, when does my residency begin?

In general, residency begins on the first physically present day in the U.S. during the year you meet the substantial presence test. There are exceptions for "nominal" days along with the closer connection exception, which can apply here. Remember that residency determines from what point you are taxable on your worldwide income, not when you are taxable.

Likewise, your residency is deemed to end on the last day that you are present in the U.S. within the year that you move from the United States. Problems can arise if you return back to the U.S. within a short period of time.

Can I elect to be treated as a taxable resident even if I do not meet any of the tests (in order to take advantage of special tax rates and laws not available to nonresidents)?

First Year Election - Sometimes it can be better to be treated as a resident than as a nonresident. There is an election available that allows a foreign national to be taxed as a resident in the initial year of a U.S. assignment even if one of the residency tests is not met for the year. To qualify, you would have to satisfy the following:

What if my home country considers me as a taxable resident at the same time the U.S. treats me as a taxable resident? Am I double taxed?

The general rules discussed above are based on the IRS Code. The United States has entered into numerous tax treaties with other countries. The purpose of these treaties is to prevent double taxation issues that may arise due to differences in the tax laws of the two countries. It is possible to be considered a resident, subject to tax in both countries. The treaties usually provide for 'tiebreaker' rules to override the IRS Code or the foreign home country tax laws. Most treaty provisions require the filing of certain documents, though, in order to take benefit of them.

I am on a short-term assignment from my home country and my employer pays for my rent and meals while I am working here in the U.S. Is any of this taxable?

The first thing you need to do is determine whether your assignment is considered "short-term" within the definition of U.S. law. An individual is treated as being on a short-term assignment in the U.S. if their tax home has not changed from their foreign location. If the intent of the assignment is to return to the original work location within one year, the assignment is considered a temporary assignment. This does not determine whether you are a resident or not. It just determines which types of payments are taxable.

The advantage of a temporary assignment is that the employer-provided benefits such as lodging, meals travel and certain other expenses are not considered taxable wages in the U.S. In this case, a resident or nonresident would not be taxed on these payments. On a long-term assignment (more than 12 months), these are typically taxed in addition to the wages.

What happens if I am a nonresident for part of the year and a resident for another part of the year?

It is possible to be taxed in one year as both a resident and a nonresident. If this is the case, a special filing is made on a single tax return, with certain forms required. During the residency period, you would be taxed on worldwide income. During the nonresidency period, you would be taxed only on effectively connected income (usually wages earned in the U.S., as noted earlier).

Can I be exempt or excluded from tax from the U.S. federal government but still be taxed by one of the States?

Yes. Please note quite a few of the 50 states of the U.S. do not follow some, or all, of the U.S. federal tax codes or recognize the Treaties between the U.S. and other countries. So, it is possible, and highly probable, you could be taxable for State purposes but may be exempt for federal. In addition, other tax filing requirements, including estate and gift taxes, social security taxes, along with other filing forms, may be required regardless of your income tax residency determination.