2023 Marcum Year-End Tax Guide

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Additionally, the court did not accept the argument that the law practice benefitted from advertising on the race cars since the firm’s name on the car was in small letters. A physician also was not successful in Sherman v. Commissioner . He had started a film company which made no money. Despite having a background in the arts, the court found the activity was not entered into to make a profit. In Gregory v. Commissioner, the Eleventh Circuit agreed with the Tax Court that the expenses associated with a not-for-profit activity should be treated as miscellaneous itemized deductions and not as an offset to the related gross income in determining adjusted gross income. This is a significant result since, under the TCJA, no deduction for miscellaneous itemized deductions through 2025 is allowed. This could leave the gross income being taxed without any offsetting deductions. For 2026 and later, miscellaneous itemized deductions would be allowed for those who itemize - but only to the extent they exceed 2% of AGI. These deductible expenses are also an add-back in determining alternative minimum taxable income. MISCELLANEOUS Monetized Installment Sales – The IRS issued proposed regulations in August to describe monetized installment sale transactions and substantially similar transactions as listed transactions, with comments from public and other interested

parties due by October 3, 2023. Under this program, a Seller attempts to defer the gain on the sale of property under a long-term installment note. A typical structure is that: 1. Seller S will transfer the property to Intermediary I on a long-term installment note (e.g., interest only annual payments with principal paid in 30 years). 2. Intermediary I sells the property to a Buyer for cash. 3. Seller S borrows an amount equal to 93% to 95% of the installment note principal from Lender L on an interest only basis with the principal paid in 30 years. Frequently, Intermediary I will lend the sales proceeds to Lender L (net of transaction fees) to fund the loan to S. The key to the transaction is that Seller S does not pledge the original installment note with Intermediary I to secure the loan. A pledge of the note, with some exceptions, would normally accelerate recognition of the installment sale gain. Promoters of this strategy point to Chief Counsel Memo 20121 as support for the tax results. In Chief Counsel Advice 202118016, the Service had previously indicated the reliance on the CCM is misplaced. The guidance suggests a number of arguments the Service will use to attack these transactions, including i) the Intermediary in the transaction

is not a bona fide buyer and serves no purpose except for tax avoidance; 2) the seller should be seen as the actual seller to the real buyer and the recipient of the buyer’s funds; and 3) the steps in the transaction should be disregarded and recharacterized under the economic substance rules of IRC sec 7701 or under a substance over-form analysis. Improperly Forgiven Paycheck Protection Program Loan is Taxable Income – In CCA 202237010, the Service stated that a PPP loan improperly forgiven is income despite there being an obligation to repay it. The facts of the CCA indicate that the taxpayer misrepresented her right to have the PPP loan forgiven. However, a footnote suggests a wide implementation of this analysis. Non-fungible Tokens – Notice 2023-27 states that the IRS will issue guidance concerning the potential treatment of Non-Fungible Tokens as “collectibles” for federal tax purposes. An NFT is a unique identifier linked to the ownership of underlying assets, including digital items or underlying assets (e.g., artwork, gems, real estate, etc). Until such guidance is issued, the Service will look through the NFT to the underlying asset it represents to determine if it should be recharacterized as a collectible.

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