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Tax Alerts

Stay up-to-date with the latest IRS tax information.

Alerts & Publications Directly from the IRS

Every two weeks the IRS releases important tax alerts. These provide tax professionals with the latest updates on items that affect their clients and their practices. We maintain an up-to-date record of these alerts.

IRS describes tax treatment of college athletic scholarships, student athletes

The IRS, in a just-released “information letter,” described the tax treatment of college athletic scholarships. The IRS reiterated that whether an individual is treated as an employee for labor law purposes is not controlling for purposes of determining if an individual is an employee for federal taxation.

The information letter responded to an inquiry from Sen. Richard Burr, R-N.C., for clarification about the federal tax treatment of college athletic scholarships following a decision by a regional office of the National Labor Relations Board (NLRB) concerning student athletes and collective bargaining. The decision by the regional office is now being reviewed by the NLRB.

Background

In March, the NLRB Region 13 Office determined that college football players receiving grant-in-aid scholarships were “employees” within the meaning of the National Labor Relations Act. The regional office found that the players were not “primarily students.” The regional office concluded that the players were entitled to choose whether or not to be represented for purposes of collective bargaining.

The NLRB regional office found that the players spent 50 to 60 hours per week on their football duties during a one-month training camp before the start of the academic year and an additional 40 to 50 hours per week on football during the three or four month football season.

IRS analysis

The IRS first noted that treatment of scholarships for federal income tax purposes is governed by Internal Revenue Code Sec. 117, which allows a taxpayer to exclude a qualified scholarship from gross income. A qualified scholarship, the IRS explained, means any amount received by an individual as a scholarship to the extent the individual establishes that, in accordance with the conditions of the grant, the amount was used for qualified tuition and related expenses. Scholarship funds used for nonqualified expenses are included in the recipient’s taxable income.

The IRS also noted that Rev. Rul. 77-263 addresses scholarships. The IRS concluded in Rev. Rul. 77-263 that the athletic scholarships were awarded by the university primarily to aid the taxpayers in pursuing their studies. As a result, the value of the scholarships would be excluded from the taxpayers’ gross incomes under Code Sec. 117.

On July 3, Burr and five Congressional colleagues filed a brief with the NLRB urging it to reverse the decision by the regional office. “Congress never intended for college athletes to be considered employees under the National Labor Relations Act, and doing so is incompatible with the student-university relationship,” the lawmakers wrote.

INFO 2014-0016

IRS explains how to determine real estate professional status under passive activity loss rules

The IRS has provided guidance on applying the passive activity loss (PAL) rules to a taxpayer who may be a real estate professional. The IRS concluded that a taxpayer’s status as a real estate professional depends on the taxpayer’s participation in all real property trades or businesses. However, the real estate professional still must materially participate in an individual activity to avoid PAL treatment of losses from the activity.

Per se rule

Ordinarily, rental activities, including rental real estate, are a per se passive activity under Code Sec. 469. If an activity is passive, losses from the activity are treated as PALs and cannot be deducted against nonpassive income, such as compensation.

Real estate professionals

There is an exception from the per se rule for a real estate professional who “performs” enough hours in all real estate trades or businesses and who “materially participates” in the particular activity. The exception requires that the taxpayer:

  • Perform more than one-half of his or her personal services in real property trades or businesses in which the taxpayer materially participates; and
  • Performs more than 750 hours of services in real property trades or businesses in which the taxpayer materially participates.

A taxpayer materially participates in an activity if he or she participates in the activity for more than 500 hours during the year. This 500-hour threshold has to be met separately for each individual activity.

Combined Real Property Business

The IRS looked at a taxpayer who owned two rental real estate properties and who also owned a real property development business. The taxpayer performed more than 750 total hours of personal services in all of the real estate activities.

The rentals and the development business were a combined real property trade or business. The question arose whether the 750-hour performance test could only apply to an individual activity (such as the separate real estate rental properties) that met the 500-hour material participation test.

The IRS concluded that this was not necessary. Since the taxpayer spent more than 500 hours in this combined real property business, time spent in each of these activities (the rentals and the property development) could be counted toward the 750-hour test. Thus, the taxpayer satisfied the requirements for being a real estate professional.

Passive activity

However, the two rental properties were separate activities. Before the taxpayer could deduct losses from either rental activity, it was necessary to determine whether the taxpayer materially participated in the individual activity. An activity is passive unless the taxpayer satisfies the 500-hour test for that activity, even if the taxpayer is a real estate professional.

CCA 201427016

IRS postpones effective date of controversial estate and trust bundled fee rules

The IRS has postponed the effective date of final regulations (TD 9664) on the application of the two percent floor for miscellaneous itemized deductions (including bundled fees) incurred by an estate or trust. In response to concerns about the regulations’ May 9, 2014, effective date, the IRS has decided that the regulations will not apply to any trust or estate until tax years beginning on or after January 1, 2015.

Miscellaneous itemized deductions

An individual can only deduct miscellaneous itemized deductions that exceed two percent of the individual’s adjusted gross income. The same two-percent threshold applies to the costs of administering an estate or trust. However, trust and estate expenses are fully deductible (and are not reduced by the two percent floor) if the costs were related to trust or estate administration and were not likely to be incurred by an individual. The final regulations identified fiduciary costs that were fully deductible, such as certain appraisal or tax preparation fees, and fiduciary costs subject to the two-percent floor, such as investment advice.

Bundled Fees

A bundled fee, such as a fiduciary’s commission, attorney’s fee, or accountant’s fee, is a single fee paid by a trust or estate that includes both categories of costs: costs that are fully deductible, and costs that are subject to the two-percent floor. The final regulations require that bundled fees be “unbundled” and allocated between these two categories. (However, if a bundled fee is not computed on an hourly basis, only the portion attributable to investment advice is subject to the two-percent floor.)

Effective Dates

For existing trusts and for estates using a calendar year, the regulations (including the unbundling requirement) would not apply until tax years beginning on or after January 1, 2015. However, for certain entities—new trusts created after May 8, 2014, estates of decedents who died after May 8, 2014, and existing estates on a fiscal year—the regulations would have applied to tax years beginning on or after May 9, 2014.

The IRS was advised that the May 9, 2014 effective date did not give fiduciaries sufficient time to implement changes needed to comply with the unbundling requirement. Fiduciaries needed more time to design and implement program changes that will allow them to determine the portion of a bundled fee attributable to the two categories of costs.

In response, the IRS decided to postpone the regulations effective date so that they will apply to all trusts and estates beginning with tax years that begin on or after January 1, 2015.

TD 9664

IRS withdraws old regulations to reflect Tax Court’s new one-rollover-per-year limit on IRAs

Reflecting the Tax Court’s decision in Bobrow (TC Memo. 2014-21) earlier this year, the IRS has withdrawn Prop. Reg. §1.408-4(b)(4)(ii). This withdrawal makes good on its announced intention earlier in Ann. 2014-15 to follow the pro-government decision. In Bobrow, the Tax Court found that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained.

The Tax Court’s decision does not affect the ability of an IRA owner to transfer funds from one IRA trustee or custodian directly to another (to so-called trustee-to-trustee transfer). It only affects rollovers in which the taxpayer/account holder receives the funds from one account and then deposits them in another.

Background

Generally, the tax code allows a tax-free rollover of an IRA if the funds distributed to the taxpayer are rolled over into an IRA for the taxpayer’s benefit within 60 days, subject to the one-rollover-per-year limit of Code Sec. 408(d)(3)(B). The Tax Court found in Bobrow that the one-year limitation under Code Sec. 408(d)(3)(B) is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer. A taxpayer who maintains multiple IRAs may not make a rollover contribution from each IRA within one year, the court held. After the Tax Court announced its decision, the IRS issued Ann. 2014-15, indicating it “anticipates that it will follow the interpretation of §408(d)(3)(B) in Bobrow and, accordingly, intends to withdraw the proposed regulation and revise Publication 590 to the extent needed to follow that interpretation.”

The IRS has indicated that it will not apply the Bobrow ruling before January 1, 2015.

Withdrawn Regulations

In 1981, the IRS issued a proposed reg that would have provided that the rollover limitation of Code Sec. 408(d)(3)(B) would be applied on an IRA-by-IRA basis. The proposed reg is contrary to the Tax Court’s decision in Bobrow. Under Bobrow, an individual cannot make an IRA-to-IRA rollover if the individual has made an IRA-to-IRA rollover involving any of the individual’s IRAs within the preceding one-year period. As a result, the IRS has withdrawn the proposed reg.

Publication 590

The taxpayers in Bobrow asked the Tax Court to reconsider its decision based on the IRS’s published guidance (Publication 590). The court denied the motion for reconsideration and reminded the taxpayers that the IRS’s published guidance is not binding precedent. Caution: The IRS has not yet updated its online version of Publication 590 to reflect Bobrow.

NPRM REG-209459-78