In this episode of Ropes & Gray’s podcast series Disputing Tax, Franziska Hertel, an associate in the tax practice, is joined by Kat Gregor, a tax partner and tax controversy group co-founder, and Brittany Cvetanovich, counsel in the tax practice, to discuss a recent Federal Circuit case, Charleston Area Medical Center, Inc. v. United States, and the interaction between that case and the brand-new proposed regulations on the so-called “three-year carried interest” rule in section 1061 of the Code.

On July 27, 2020, the Senate Republicans proposed the Health, Economic Assistance, Liability Protection and Schools Act (HEALS Act) in response to the House passing the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act). The HEALS Act is a combination of eight individually proposed bills from the Senate. Both the HEALS Act and the HEROES Act are commonly referred to as Phase 4 of the federal government’s response to the COVID-19 crisis.

As the Senate Republicans had done with the HEROES Act, the House Democrats have declared this proposal “dead on arrival.”

Nonetheless, below are (i) tax highlights of the notable tax-related provisions of the HEALS Act and the HEROES Act, as they may be negotiated further; (ii) how they compare to each other; and (iii) how they compare to the CARES Act (also known as Phase 3 of the federal government’s response to the COVID-19 outbreak). Hyperlinks to the Ropes & Gray Alerts on both the HEROES Act and the CARES Act can be found in the respective headings of the table below.

The cost of the HEALS Act is projected to be approximately $1 trillion. The cost of the HEROES Act is projected to be approximately $3 trillion.

Click here to read the full alert.

Update: On July 15, the Internal Revenue Service announced in news release IR-2020-158 that taxpayers who have experienced delays with the process of Form 7200, Advance Payment of Employer Credits Due To COVID-19 will receive letters. If the IRS rejected taxpayer’s Form 7200 or made a change to the requested amount of advance payment due to a computation error, the taxpayer will receive letter 6312 explaining the reason for rejection or list the new payment amount if the old amount was due to a computation error. The taxpayer will receive letter 6313 if the IRS needs written verification of the taxpayer’s current mailing address in order for the IRS to process the taxpayer’s Form 7200.

Update: On July 8, the Internal Revenue Service issued Notice 2020-54 as guidance for employers regarding the requirement to report amounts of qualified sick and family leave wages paid to employees under the Families First Coronavirus Response Act. Under Notice 2020-54, employers will be required to report payment to employees either on Box 14 of Form W-2, or in a separate statement. The notice also provides employers with language to use on Form W-2 or in the statement to employees. This reporting requirement is imposed to assist employees who are self-employed to properly claim their qualified sick and family leave equivalent credits.

On Friday, March 20, 2020, the Treasury Department, Internal Revenue Service, and the Department of Labor issued primary guidance on the Families First Coronavirus Response Act (the Act) (commonly referred to as Phase 2) in Notice IR-2020-57 (the Notice). Please see alert for discussion of two new important tax details provided in the Notice regarding the Act’s employer tax credits, and for additional discussion of the Act, generally. The two new important tax details are (1) that employers can be “paid” by retaining certain funds otherwise due to the government (including income tax withholding from ALL employees), and (2) that rebate requests will be processed by IRS within two weeks or less. Continue Reading Published Guidance on Implementation of Families First Coronavirus Response Act

In this episode of Ropes & Gray’s podcast series, Disputing Tax, Pascal Mayer, a senior attorney in the employment, executive compensation & employee benefits group, is joined by Kat Gregor and Loretta Richard, partners in the tax, employment & benefits practice and co-founders of the tax controversy group, to discuss the payroll tax provisions of the Coronavirus Aid, Relief and Economic Act (also known as the CARES Act) and factors that employers should consider in their coronavirus response. Enacted on March 27, and commonly referred to as “Phase 3” of the federal government’s response to the coronavirus pandemic, the CARES Act provides immediate financial relief to eligible employers by allowing them to retain some payments that would otherwise be owed to the federal government, through employee retention credits and deferral of the employer portion of social security tax payments. This assistance may be critically important to employers who are struggling to meet costs when faced with diminishing revenues or who had their operations fully or partially suspended due to governmental orders.

 

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), commonly referred to as Phase 3 of the federal government’s response to the coronavirus outbreak, was enacted on March 27, 2020. See Ropes & Gray Alerts on CARES Act, and certain key tax provisions of CARES Act. The CARES Act created opportunities for corporations to receive tax refunds that otherwise may not have been available, and the chart below describes certain procedures by which corporations can request such refunds (subject to the notes below).

NOTE: The IRS recommended on April 8 that taxpayers await further instruction from the IRS before utilizing traditional processes to claim refunds under the CARES Act. Additional information will be posted to irs.gov in the coming days.

Updated 4/13/20 — The IRS announced temporary procedures to accept FAX transmissions of tentative refund claims (Form 1139), but at this time the IRS has not identified any other corporate forms. https://www.irs.gov/newsroom/temporary-procedures-to-fax-certain-forms-1139-and-1045-due-to-covid-19

Updated 4/21/20 — The IRS issued guidance setting forth the methods to obtain refunds or credits for a taxpayer that placed “qualified improvement property” into service after Dec 31, 2017. (Rev. Proc. 2020-25)

Updated 4/30/20 – The IRS confirmed in a webinar that Notice 2020-26 applies to consolidated corporations in addition to stand-alone corporations.

Updated 6/18/20 – Clarifying Form 1139 due dates regarding groups of consolidated corporations.

Updated 7/9/20 – The IRS released temporary regulations providing flexibility for waiving carryback periods for consolidated NOLs.

How can a corporation get a refund for the 2018 or 2019 tax year (i.e., paid more tax than was due)? Not yet filed federal income tax return:

  • Quick refund (Form 4466)
    • Generally, available to taxpayers who have overpaid estimated taxes in the current year by at least 10% of the expected liability, and at least $500.
    • Generally, due after the end of the corporation’s tax year, and not later than the due date for filing the corporation’s tax return (not including extensions).
    • Notice 2020-23 extends the filing deadline to July 15, 2020 for a Form 4466 that would otherwise have to be filed on or after April 1, 2020, such as for calendar year 2019.
    • Must be filed before the corporation files its federal income tax return for the year.
    • IRS will make a determination within 45 days from the date application is filed.

Already filed federal income tax return:

  • Amended Return (Form 1120X)
    • Must be filed within three years after the date the corporation filed its original return, or within two years after the date the corporation paid the tax (if filing a claim for a refund), whichever is later.
    • Prior to the COVID-19 pandemic, it would typically take three to four months for the IRS to process Form 1120X.
    • The IRS has clarified in Rev. Proc. 2020-25 that an amended return is one of two available avenues for a taxpayer to retroactively obtain the benefit of immediate expensing of “qualified improvement property.”
  • Form 3115 (Change in accounting method)
    • Generally, under Rev. Proc. 2020-25, a taxpayer that placed “qualified improvement property” (QIP) into service during prior years may file for an accounting method change to obtain the benefit of a corresponding section 481(a) adjustment during the current taxable year, rather than in the applicable prior year(s).
    • A corporation may use this approach to capture the prior-year benefit of treating the QIP as 15-year depreciable property that qualifies for 100% bonus depreciation rather than 39-year property.
    • Under Rev. Proc. 2020-25, Form 3115 would be automatically accepted by the IRS.
    • During a webcast on 4/27/20, the IRS said taxpayers who already filed 2019 tax returns could amend the 2019 return with an accounting method change, rather than wait for a 2020 tax return or amend two tax returns. This option would have to be executed within six months of the 2019 return filing.
How does a calendar-year corporation carry back NOLs under the CARES Act?
  • First, file a corporate tax return (Form 1120) for the year from which NOLs are to be carried back.
  • Second, file one of the following:
    • Tentative Refund (Form 1139)
      • Notice 2020-26 granted an additional 6 months to file Form 1139 making the new deadline no later than 18 months after the close of the taxable year in which an NOL arose for years beginning during the 2018 calendar year and ending on or before June 30, 2019. The IRS has confirmed that the Notice 2020-26 time extension also applies to consolidated corporations. For years ending after June 30, 2019, the form is due 12 months after the close of the year.
      • When a corporation joins a group of consolidated corporations, the 12 month (or 18 month as applicable) deadline to file begins at the end of the full tax year of the acquiring group of consolidated corporations (not from the end of the short year triggered by joining the group).
      • New regulations make it easier for a consolidated group of corporations that acquire a corporation from another consolidated group to waive carrying back NOLs to years of the acquired corporation prior to the acquisition.  Whereas a split-waiver election of this type previously had to be filed with the return for the year the corporation joined the consolidated group, the election can now be filed with the return for the year in which the NOL arises.  See Section 1.1502-21T as revised.
      • IRS is required, to the extent practicable, to make a limited examination of the refund claim within 90 days of filing the application, but IRS has expressed doubt about whether 90 days will be practicable under current circumstances.
      • IRS retains the right to subsequently conduct a full audit, which means the taxpayer could have to return the refund.
      • IRS announced that it will accept FAXED applications of Form 1139 beginning on 4/17/20.
    • Amended Return (Form 1120X) (described above).
  • Special rules apply to certain non-calendar year taxpayers and taxpayers with foreign subsidiaries that have income inclusions resulting from the Section 965 toll charge imposed by the 2017 TCJA. These rules are not discussed here.
What if a corporation desires not to carry back NOLs?
  • Taxpayers can elect not to carry back NOLs.
    • Rev. Proc. 2020-24 describes the irrevocable election made by attaching a separate statement for each year being waived (2018, 2019, or both) to the taxpayer’s federal income tax return for the first taxable year ending after 3/27/2020.
    • The statement must say that the taxpayer is electing to apply Section 172(b)(3) under Rev. Proc. 2020-24 and the taxable year for which the statement applies.
  • A separate decision on whether to waive the carryback can be made for each year in which NOLs arise.