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“A long time ago, in a galaxy far, far away… There came a time of revolution, when rebels united to challenge a tyrannical empire.”
No, that’s not a reference to any particular tax authority, even though it feels like it could be. It’s a reference to Star Wars Day—May 4th.
When the Star Wars movie franchise kicked off in 1977, it didn’t feel like a tax movie. But the first words in the opening crawl of Star Wars Episode I: The Phantom Menace suggest otherwise, noting, “Turmoil has engulfed the Galactic Republic. The taxation of trade routes to outlying star systems is in dispute.” It turns out that Palpatine, who first appeared in The Empire Strikes Back as the Emperor, rose to power because of a dispute around the taxation of trade routes.
The Palpatine trade dispute isn’t the only reference to tax in Star Wars movies. Did you know Jabba the Hut instituted a “murder tax” on Tatooine because murder happened so frequently? As tax compliance automation software provider Avalara points out, it was a pretty unreliable tax, given you’d have to lose a taxable citizen to collect.
And one more bit of Star Wars-inspired tax trivia—it’s rumored that George Lucas planned the date of the sale of his company to Disney before the end of the year in 2012 to save over $100 million in taxes. That’s because when President Obama was re-elected at the end of 2012, it was widely assumed that the so-called Bush tax cuts would be allowed to expire for top income earners. The Bush tax cuts did expire on January 1, 2013. However, the next day, Obama signed the American Taxpayer Relief Act of 2012 into law, which reinstated many of the tax cuts, effective retroactively to the previous year—but not for those at the top.
As we creep closer to 2025, expect a lot of discussions about the proposed budget, election-year promises, and those sunsetting tax provisions. Here’s a quick preview of what folks are talking about.
(To quote Han Solo, “Don’t everybody thank me at once.”)
A tax provision “sunsets” when it hits an expiration date—that’s because not all tax cuts (or bumps) are permanent. Sometimes—usually due to political considerations related to the budget—tax provisions are written with the idea that, unless they are renewed, they will just fade away into the sunset. While many tax breaks for corporations under the Tax Cuts and Jobs Act of 2017 (TCJA) were made permanent, those targeted to individuals will end if not renewed.
It’s long been the case that what Congress has granted, Congress can take away. Some tax strategies that are allowed now could be running on fumes. But will they really fade away? Some, like Health Savings Accounts, have a better chance of staying on the books than others (hello, Bitcoin washes).
Outside of those sunsets, Congress must grapple with the White House’s budget proposal. The two branches have not been in agreement on much—so it will be interesting to see whether a set of proposals taxing unrealized gains or proposed tax changes (including capital gains increases and eliminating carried interest loopholes) actually make it through. (My money is on no significant changes just before the election.)
Speaking of no major changes, there have been a lot of stories written about tax and other fraud schemes during the Covid-19 pandemic. I know—I’ve written a bunch of them. Often, the facts of the case are maddening, as here. According to court documents, Adrian Fluellen and his co-defendant, Tracey Dotson, used stolen personal identification, including Social Security numbers, to file hundreds of false unemployment (U.I.) claims electronically. As I read through his sentencing memorandum, I couldn’t help but be struck by a few things: his age (he was 25 at the time), his children (he has three young kids), and his brother (who told the judge that Fluellen watched over him—he ultimately became a police officer). Fluellen was eventually sentenced to 51 months in prison. (☆)
Another case involving stolen personal information made headlines last year when it was revealed that former IRS contractor Charles Littlejohn illegally accessed and distributed the private tax information of corporate and wealthy individual taxpayers, including former President Donald Trump and fellow billionaires Elon Musk, Jeff Bezos, Warren Buffett and Michael Bloomberg. (☆) Littlejohn eventually pleaded guilty to unauthorized disclosure of tax return and return information—a violation of section 7213(a)(1) of the tax code, the most serious offense for leaking tax information. And in January of 2024, Littlejohn was sentenced to five years in prison for his actions. (☆)
We know some of the taxpayers who were impacted. But the IRS is required, by law, to give notice to any other victims of the breach they can identify, even if their names were never published. It is doing so now. Taxpayers are reporting receipt of Letters 6613-A, which outlines the next steps—sort of. One of the potential remedies is a lawsuit, but by statute, you can only sue the government if the leaker was an employee. Here, Littlejohn is an independent contractor. But, according to at least one lawsuit that’s been filed already, he had the same kinds of access as an employee. The outcome of that matter, which is ongoing, will definitely shape some of what happens next. (☆)
Finally, folks aren’t heading a galaxy away, but travel is in the air—I’ll be taking some trips soon, too (more on those in a future newsletter). But tops on a lot of travel bucket lists is Venice, which just got more expensive this summer. Venice recently started charging an entry fee—a so-called tourist tax—for day-trippers from April 25 to July 14. The fee of five euros can be paid once, and it allows access for the day to Venice and the minor islands of the Venetian Lagoon. Critics argue that the measure effectively turns the historic city into a theme park—and won’t address the underlying issues of overcrowding from tourism.
There’s a lot more good stuff below—so keep scrolling.
Thanks for reading, and May the 4th be with you.
—Kelly Phillips Erb (Senior Writer, Tax)
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Charitable Organizations
While tax season is over for many taxpayers (except those of us still on extension), tax-exempt organizations still have to file. The filing deadline for many tax-exempt organizations is May 15, 2024. (☆)
According to the 2023 IRS Data Book, the IRS recognized nearly 2.0 million organizations in fiscal year 2023, including new determinations, as tax-exempt. More than 1.8 million of these organizations were exempt under section 501(c), with 1.5 million of these qualifying as tax-exempt under Internal Revenue Code Section 501(c)(3).
In the same year, the IRS closed 119,491 applications for tax-exempt status. The overwhelming majority of those applied for exemption under section 501(c)(3).
Questions
Making charitable donations is often easy, but figuring your charitable contribution deduction can be tricky. A reader wrote, in part:
I know I could deduct the donation, but if we say the home is valued at $150,000, I worry that trying to take that deduction all at once would hit some limits. Can I donate a large item like this over time?Charitable contribution deductions can get complicated quickly, so I’m going to talk about general limits—with the caveat that you should definitely talk with your tax professional since exceptions may apply.
For the purpose of applying the deduction limits to your charitable contributions, qualified organizations can be divided into two categories. The first category includes these organizations like churches, schools, hospitals, publicly supported charities and private operating foundations—sometimes referred to as “50% limit organizations.” (You can find a complete list in IRS Pub 526.) Most charitable organizations fall into this bucket.
In true tax fashion, the second category includes any type of qualified organization that isn’t in the first category.
If your total charitable contributions for the year are 20% or less of your AGI (the amount on Form 1040, line 11), you won’t rub up against any limits.
If they are more than 20% of your AGI, you’ll want to consider the kind of property you give and the type of organization you give it to. I’m going to focus on a few of the most common.
If you make cash contributions to one of those 50% organizations, your deduction for the cash contributions is limited to 60% of your AGI. So, for example, if your AGI is $100,000, your cash contribution deduction is limited to $60,000.
This 60% limit doesn’t apply to non-cash charitable contributions. If you make non-cash contributions to one of those 50% organizations, your deduction is typically limited to 50% of your AGI, less any cash contributions subject to the 60% limit.
A 30% limit applies to non-cash contributions of capital gain property (if you use fair market value without a reduction for appreciation), while a 20% or 30% limit applies to non-cash contributions that are “for the use of” the qualified organization instead of “to” the qualified organization.
All that said, your bigger question revolves around what happens if you can’t take the deduction all at once. The good news is that you can carry over any contributions you can’t deduct in the current year because they’re over the limit. Normally, you can carry those for five years or until they’re used up, whichever is sooner.
Those carryovers are subject to the same percentage limits in future years as in the year of contribution. And for each category, you’ll deduct the carryovers only after deducting allowable contributions in that category for the current year. If you have carryovers from two or more prior years, use the carryover from the earlier year first.
Some additional rules and restrictions can apply, and special rules exist if you are married in some years but not others; you have different spouses in different years; you change from married filing separately to married filing jointly in a later year (or vice versa); you have a net operating loss; you claim the standard deduction in a carryover year, or you become a surviving spouse. If you are in one of these situations, consult with a tax professional.
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A Deeper Dive
So, last week, I was fairly adamant that you should keep an eye out on Farhy, a case on appeal from the U.S. Tax Court focused on civil penalties and automatic assessments. But even I didn’t see this coming: a 3-0 ruling in favor of the IRS was issued on May 3, 2024. (☆) To recap, in Farhy, the taxpayer was required to report his ownership interests in foreign corporations (Farhy didn’t). He challenged whether the IRS had the legal authority to assess section 6038 penalties. The Tax Court said no. (☆) Later, in Mukhi, the Tax Court opted out of analyzing the penalties under section 6038(b), referring to Farhy. The Court also rejected the taxpayer’s Eighth Amendment arguments related to section 6677, finding that the additions were penalties, not fines. (☆)
Eric Rietveld, a tax planning and controversy attorney at Sullivan & Worcester, says that he thinks it’s a good ruling in that “it didn’t give either party exactly what they were looking for.” But he thinks this may put an end to speculation about the IRS’ enforcement ability with respect to the penalties. “It should be a pretty good nail in the coffin.”
With that litigation maybe wrapping up—there’s a potential flurry of new litigation on the horizon. On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning non-compete agreements. The final rule made clear “that it is an unfair method of competition—and therefore a violation of section 5—for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule’s effective date.”
On the same day as the ruling, Ryan, a global tax services and software provider with its principal place of business in Dallas, Texas, issued a legal challenge to the new rule, filing suit in the U.S. District Court for the Northern District of Texas. (☆)
It was the first such suit filed to counter what the company described as “the FTC’s lawless action, which imposes an extraordinary burden on businesses seeking to protect their intellectual property (IP) and retain top talent within the professional services industries.” Two more challenges were filed quickly after the ruling. On April 23, 2024, the same day as Ryan’s court challenge, the U.S. Chamber of Commerce filed a lawsuit against the FTC in Texas, and two days later, ATS Tree Services, based in Pennsylvania, also filed a lawsuit against the FTC. As with actions geared towards the Corporate Transparency Act (CTA), there’s momentum here that could result in more litigation. (☆)
(That also means it’s more important than ever to file the proper forms and talk to tax professionals when sorting out U.S. and foreign tax implications.)
Positions And Guidance
The American Bar Association (ABA) Tax Section sent a letter to the U.S. Senate expressing support for the increases to the refundable Child Tax Credit contained in H.R. 7024, the Tax Relief for American Families and Workers Act of 2024. The bill was passed by the House of Representatives on January 31, 2024, but remains stalled in the Senate.
The American Institute of Certified Public Accountants (AICPA) submitted recommendations to the U.S. Treasury and IRS regarding the tax classification of purpose trusts, and functionally similar structures, for federal income tax purposes. The recommendations will simplify filing for taxpayers and practitioners and reduce the administrative burden on the IRS.
Important Dates
📅 May 15, 2024. Information tax returns (series 990) are due for tax-exempt organizations with a tax year ending in December.
📅 May 17, 2024. Deadline for filing for refunds for tax year 2020. The IRS has announced that almost 940,000 people have unclaimed refunds for tax year 2020.
📅 June 6-7, 2024. NYU School of Professional Studies Federal Real Estate and Partnerships Tax Conference. Mayflower Hotel, Washington, DC. Registration required.
📅 June 17, 2024. Second quarter estimated payments are due for individuals for the 2024 tax year.
Noteworthy
Nixon Peabody LLP announced the addition of partners Frederick Miller and Andrew Rubin to the firm’s Community Development Finance practice, which focuses on structuring, negotiating, and closing tax credit transactions that create positive impacts on local communities. Nixon Peabody has more than 600 attorneys in 15 locations in the U.S., Europe, and Asia.
CliftonLarsonAllen LLP (CLA), the eighth largest accounting firm in the United States, announced that Ronald Blue & Co. CPAs team members have joined the firm as of May 1, 2024. CLA employsnearly 9,000 people in more than 130 U.S. locations.Sovos, a global provider of tax, compliance, and trust solutions and services, has introduced its Indirect Tax Suite. Part of the Sovos Compliance Cloud, the Indirect Tax Suite assists enterprises in managing indirect tax obligations with governments, buyers, suppliers, and consumers.
The IRS encourages tax professionals to register for the 2024 IRS Nationwide Tax Forum, coming this summer to Chicago, Orlando, Baltimore, Dallas, and San Diego. This year’s agenda will feature more than 40 sessions on tax law and ethics as well as hot topics like beneficial ownership information, cybersecurity, tax scams and schemes, digital assets, and clean energy credits. Enrolled agents, certified public accountants, Annual Filing Season Program (AFSP) participants, and other tax professionals can earn up to 19 continuing education (CE) credits.
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Trivia
In 2013, the White House posted a response to a petition on its website asking that the federal government “[s]ecure resources and funding, and begin construction of a Death Star by 2016.” The petition, which garnered nearly 35,000 signatures, was posted on the White House petition site in November. How much did the administration say that the construction of the Death Star would cost taxpayers?
A. $850 million
B. $850 billion
C. $850 trillion
D. $850 quadrillion
Find the answer at the bottom of this newsletter.
Our Team
I hope you’ll get to know some of our staff and contributors. In honor of May 4, I asked: Who is your favorite character from the Star Wars movies and why?
Kelly Phillips Erb (Senior Writer, Tax): Princess Leia. She was fearless and beautiful. She was strong and clever. And she felt comfortable giving orders: Someone has to save our skins. Into the garbage chute, fly boy!
Emma Whitford (Writer, Education): I love them all, but probably R2-D2 or BB8. They are just so cute!
Sergei Klebnikov (Writer, Money): Obi wan Kenobi!
Matt Schifrin (Executive Editor, Money): Everyone likes R2-D2.
Andrew Leahey (Contributor, Tax): Darth Vader! I saw Return of the Jedi first and knew he turned good. Gives a different valence to the character in the rest of the movies.
Key Figures
That’s the number of Identity Protection Personal Identification Numbers issued to taxpayers. It’s a six-digit number that lets taxpayers prevent someone else from filing a tax return using their Social Security Number.
Trivia Answer
The answer is (D) $850 quadrillion.
Yes, this is a real thing that happened. Paul Shawcross, chief of the White House Office of Management and Budget’s science and space branch, crafted the response which said that while “the Administration shares your desire for job creation and a strong national defense,” a plan to build a Death Star isn’t in the works. He then offered a few reasons, including:
- The construction of the Death Star has been estimated to cost more than $850 quadrillion. We’re working hard to reduce the deficit, not expand it.
- The Administration does not support blowing up planets.
- Why would we spend countless taxpayer dollars on a Death Star with a fundamental flaw that can be exploited by a one-man starship?
The Death Star, officially called the DS-1 Orbital Battle Station, appeared in the Star Wars movies. If you remember your Star Wars history, you’ll recall that Princess Leia was helping the Rebel Alliance take out the Death Star. The Death Star destroys the Princess’ planet and Luke Skywalker eventually destroys it instead (hence Shawcross’ reference to the flaw). In a subsequent film, the Empire attempts to rebuild the station but is thwarted again.
Shawcross went on to note in his response that while we don’t have a Death Star, we do “have floating robot assistants on the Space Station, a President who knows his way around a lightsaber and advanced (marshmallow) cannon, and the Defense Advanced Research Projects Agency, which is supporting research on building Luke’s arm, floating droids, and quadruped walkers.”
He concluded his response by encouraging Americans to pursue careers in a science, technology, engineering, or math-related field.
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