Top Ten Items of Tax Policy Interest for 2015 - #10

This post completes (!) my list of ten news items and activities from 2015 that I think have particular tax policy (and tax reform) relevance.  For number 10 - the increased prevalence of the worker classification issue and the increased cost starting in 2015 - and the need to finally address this decades old problem.

The freelance or 1099 or gig economy means a lot more people work as contractors rather than employees. The tax and non-tax federal and state laws have never been sufficient for easily distinguishing between these two types of workers. The consequences for getting it wrong are costly for both the employer and worker. Employers face payroll taxes, penalties and interest for misclassifying employees as contractors. Starting in 2015, some of these employers will also have exposure to the employer mandate which can be a penalty of $2,080 per full-time employee, assuming at least one full-time employee claims the premium tax credit. Employers also have risks of disqualified benefit plans for misclassifying workers.

The new group of workers we seem to hear most about are Uber and Lyft drivers. There is also litigation going on for these companies regarding application of labor laws to the workers. (See my June 20, 2015 post for more and links to District Court decisions that are still in litigation today.) Another complication in these cases, I think, is exactly what type of businesses Uber and Lyft are. They claim they are network platforms that merely connect drivers and riders. But, they don't seem to be like the Yellow Pages or eBay. These companies set the prices, Uber denies tips, they offer incentives to get new drivers and passengers, and state laws require them to do background checks and provide insurance. I saw an ad for a tax analyst for one of these companies a few months ago which made it sound like a transportation provider rather than a matchmaker.  It will be interesting to see what the federal court says in 2016.  And, while these are labor law cases at the moment, I suspect the IRS will take a look (it may be doing so already) and given similar classification schemes, will find a similar conclusion. If that conclusion is employee rather than contractor, for these two companies, I don't see any way they can avoid a significant "assessable payment" under Section 4980H(a) for not offering coverage to all of their full-time employees and their dependents up to age 26.  Employers do not (cannot) offer health coverage to contractors.  And, given the income range of many of the drivers, it's a good bet that at least one (likely many), obtained a premium tax credit.

Briefly, there are two ways the Section 4980H penalty becomes relevant in the worker classification tax issue today:
   First, an employer thinks it is not an "applicable large employer" (ALE) so doesn't worry about the penalty. But, it turns out that one ore more of its contactors who work on average 30 or more hours per week per month is really an employee.  Now, counting these misclassified workers (whether full-time or part-time), the employer finds that in its base year, it had 50 ore more full-time and full-time equivalent employees and is an ALE, potentially subject to the Section 4980H assessable payment.
   Second, the employer already knows it is an ALE. If it has enough full-time misclassified workers, it might find that it did not offer coverage to at least 95% of its full-time employees and their dependents up to age 26 and so has exposure to the Section 4980H(a) penalty if at least one full-time employee claims the premium tax credit.  The penalty is $2,080 per full-time employee, calculated on a monthly basis (so 1/12 of this amount for each month there is a violation).  For a large company, this can be quite a large, non-deductible penalty.

Will Congress step in and provide some clarification?  Why not do what was done for direct sellers and real estate agents years ago and statutorily make these freelancers contractors (non-employees per Section 3508)?  Why not also change non-tax laws to make the workers eligible for more safety net provisions?  I'll have more on this in 2016 - for both state and federal law significance).  I think worker classification is an area definitely in need of and capable of being moved into the 21st century (long overdue).

My complete list of ten news and activities of 2015 with tax policy relevance (no ranking involved):

1. Congress can alter our tax system via a lot of non-tax bills - here
2. IRS funding challenges - here 
3. Justice Kennedy called for a review of the 1992 Quill decision - here 
4. IRS disagreeing with a court decision via a proposed regulation - here 
5. Why not let the Internet Tax Freedom Act just expire - here
6. A growing amount of non-binding "guidance" from the IRS - here 
7. Due date changes starting for 2016 returns to improve tax administration - here 
8. BEPS - base erosion and profit shifting - here 
9. Tax issues in the sharing economy and reality that they can be simplified - here 
10. Worker classification in the freelance/1099/gig economy - above. 

Happy New Year!    What do you think?

Top Ten Items of Tax Policy Interest for 2015 - #9

Continuing with my list of ten news items and activities from 2015 that I think have particular tax policy relevance.  Today, for number 9 - tax issues of the sharing economy. 

By sharing - I mean property sharing, such as renting out all or part of your home or other residence or letting others rent your car or other property. These activities involve some complicated areas of the law which don't readily address the wide range of arrangements people have.  Some of these issues and complexities include:

• Is the real property rental deductions limited by Code section 280A(c)(5) or 469 or neither?
• Is self-employment tax owed on the real estate rental?  Yes, if there are sufficient services rendered to the occupants (see Reg. 1.1402(a)-4(c)(2)).
•  Is the activity engaged in for profit?  I think occasional renting out of your car where the company matching the owner and renter sets the price and there might even be a gizmo on the car such that the renter can just take the car, might not rise to the level of a trade or business. If true, expenses are only deductible as miscellaneous itemized deductions subject to a 2% of AGI limit.
• Is the owner subject to business license tax in their city (and/or the city where the property is located) and did they pay it?  What other local taxes might apply?
• For short-term real estate rentals, is transient occupancy tax (TOT) owed to the city or county?
•  Practitioners - how much of this is covered in your engagement letter? Does your client this you will advise them if TOT or business license tax is owed? What is your client's rentals are illegal under local law (the income is still taxable, but how much do you or should you be involved)?  I've got some more background and due diligence considerations in this article: Taxation and Today's Digital Economy, CCH's Journal of Tax Practice & Procedure, May-June 201.

Some policy considerations:

• Can these rules be simplified, particularly if the individual's income is below a certain amount?
• Should some sharing activities, such as your car, be treated as generating investment income rather than business income?  Aren't you just generating income from unused capacity of the asset - getting back some of your investment? For example, you need a car to drive two days a week, but own a car 24/7/365.  What is the proper tax classification?  Does it matter?  Yes, for self-employment tax and other purposes.

Examples of some of the complexities and varied compliance considerations for home rentals follow:

1. Santa Monica, CA – On 5/12/15, the City Council enacted Ordinance 2484 to allow “home sharing” while continuing to disallow “vacation rentals.” For more, see the city's 16-page guide.  The guide also includes the ordinance and TOT and business license forms. Also see the city’s website on home-sharing. 
2. Austin, TX – this website explains types of rentals and notes a $235 license fee.
3. Colorado – Sales 11 document,
4. Mill Valley, CA – this website also encourages hosts to provide information to renters about activities and events in the city, as well as evacuation routes.
5. Philadelphia, PA – “limited lodging” + July 2015 change in ordinance + flowchart 
6. Portland, OR – Accessory Short-Term Rental Permit. 
7. San Francisco, CA (home of Airbnb) – this website describes restrictions, registration and taxes. In-person registration is required and a home may not be rented for more than 90 days during the year when the owner is not present, among other rules.You must register your home rental in person at the city offices.
8. Savannah, GA – this website on short-term rentals also has a link to relevant law that notes that sales tax is also owed.

What do you think?

My list so far of news and activities of 2015 with tax policy relevance (no ranking involved):

1. Congress can alter our tax system via a lot of non-tax bills - here
2. IRS funding challenges - here 
3. Justice Kennedy called for a review of the 1992 Quill decision - here 
4. IRS disagreeing with a court decision via a proposed regulation - here 
5. Why not let the Internet Tax Freedom Act just expire - here
6. A growing amount of non-binding "guidance" from the IRS - here 
7. Due date changes starting for 2016 returns to improve tax administration - here 
8. BEPS - base erosion and profit shifting - here

Top Ten Items of Tax Policy Interest for 2015 - #8

Continuing with my list of ten news items and activities from 2015 that I think have particular tax policy relevance.  Today, for number 8 is the OECD's BEPS project. It looks at how tax systems may need to change to address the digital economy, such as advertising revenue generated by Google or trademark income generated by Starbuck's and other companies that can be separated from the economic activity to be taxed in lower tax rate jurisdictions. Something not easily done or possible when the economy was mostly about moving widgets between countries.

Background: At the G20 meeting in June 2012 in Mexico, the group prepared a declaration. One of the items in it stated: 

“48. In the tax area, we reiterate our commitment to strengthen transparency and comprehensive exchange of information. We commend the progress made as reported by the Global Forum and urge all countries to fully comply with the standard and implement the recommendations identified in the course of the reviews, in particular the 13 jurisdictions whose framework does not allow them to qualify to phase 2 at this stage. We expect the Global Forum to quickly start examining the effectiveness of information exchange practices and to report to us and our finance ministers. We welcome the OECD report on the practice of automatic information exchange, where we will continue to lead by example in implementing this practice. We call on countries to join this growing practice as appropriate and strongly encourage all jurisdictions to sign the Multilateral Convention on Mutual Administrative Assistance. We also welcome the efforts to enhance interagency cooperation to tackle illicit flows including the outcomes of the Rome meeting of the Oslo Dialogue. We reiterate the need to prevent base erosion and profit shifting and we will follow with attention the ongoing work of the OECD in this area.”

The OECD responded with a study on how the new economy was leading to base erosion and profit shifting (BEPS) and possible actions to address it. .

Concerns included shifting profits to tax havens which did not correspond to where the company’s economic activities took place. This is more easily done when a company derives income from services (such as advertising) and intangibles (such as licensing). The initial study released in February 2013 stated: “Global solutions are needed to ensure that tax systems do not unduly favour multinational enterprises, leaving citizens and small businesses with bigger tax bills.” [OECD, Addressing Base Erosion and Profit Shifting, 2/12/13]

Also, per the OECD FAQs: “The BEPS Project is not about increasing corporate tax rates. Non- or low-taxation is not itself the concern, but it becomes so when it is achieved through practices that artificially separate taxable income from the activities that generate it. These strategies may increase tax disputes as countries fight against tax strategies that defy common sense. Implementation of the recommendations coming out of the BEPS Project will reduce those disputes, giving business greater certainty, and reinforcing the fairness and consistency of international tax system.” [Q&A 127]

Action Items: Soon after the project began, the OECD released its 15 action items of study and recommendations. This included examining the digital economy and issues of transfer pricing. Details and links (from the OECD BEPS website):

	Explanatory Statement 2015 (EN)
‌	Action 1: Addressing the Tax Challenges of the Digital Economy
‌	Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements
	Action 3: Designing Effective Controlled Foreign Company Rules
	Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments
	Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
	Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances
	Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status
	Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation
	Action 11: Measuring and Monitoring BEPS
	Action 12: Mandatory Disclosure Rules
‌	Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting
	Action 14: Making Dispute Resolution Mechanisms More Effective
	Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties

 
Final Package – On 10/5/15, the OECD released the “final BEPS package.” Per the press release: ““The OECD presented today the final package of measures for a comprehensive, coherent and co-ordinated reform of the international tax rules to be discussed by G20 Finance Ministers at their meeting on 8 October, in Lima, Peru.  The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project provides governments with solutions for closing the gaps in existing international rules that allow corporate profits to disappear or be artificially shifted to low/no tax environments, where little or no economic activity takes place.

“Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant.”

Actions addressed include multi-country reporting for transfer pricing, eliminating treaty shopping, and rationalizing VAT collection in the digital economy. For details of the recommended actions, a short video and links to lots of background materials and recommendations, see the OECD’s main BEPS website - http://www.oecd.org/tax/beps.htm.

What will happen next? Some action can be taken by the IRS, such as their release of proposed regulations on 12/23/15 calling for country-by-country reporting REG-109822-15.  Other items will await congressional action, likely as part of tax reform - so likely not until 2017 although Congresmen Ryan and Brady might want to work on international tax reform in 2016. We'll see.

What do you think?

My list so far of news and activities of 2015 with tax policy relevance (no ranking involved):

1. Congress can alter our tax system via a lot of non-tax bills - here
2. IRS funding challenges - here 
3. Justice Kennedy called for a review of the 1992 Quill decision - here 
4. IRS disagreeing with a court decision via a proposed regulation - here 
5. Why not let the Internet Tax Freedom Act just expire - here
6. A growing amount of non-binding "guidance" from the IRS - here 
7. Due date changes starting for 2016 returns to improve tax administration - here

Top Ten Items of Tax Policy Interest for 2015 - #7

Continuing with my list of ten news items and activities from 2015 that I think have particular tax policy relevance.  Today, for number 7 is the change in due dates starting with 2016 returns of Form 1120, 1065, FBAR and a few others. 

The due date proposal has been around for some time. It was even included in Congressman Camp's Tax Reform Act of 2014 (H.R. 1, 113rd Congress).  The changes were advocated by the AICPA (see this 10/19/15 Tax Insider article by Eileen Sherr for more on that). For a nice summary of the due date changes, see this AICPA due date chart (practitioners - I encourage you to print this one out as it will help you prepare for the change. Also during the upcoming filing season, think about what would be different if the change were effective for 2015 returns so you can get a sense of what will be different in terms of workflow for 2016)..

I think this is an important policy change as it brings some logic into the return filing system.  For example, the change makes partnership returns due one month earlier and C corporation returns due one month later. This makes sense because no one needs the C corp information, but millions of partners wait for the partnership information so they can get their returns filed.

The changes also pushes out the extended due date for Form 1041 from September 15 to September 30.  That might be a big help for many practitioners with little, if any, disruption for the tax system as a whole.

So, it is nice to see this logical change occur and that it not have to wait for a big tax reform proposal for it to occur.

What do you think?

My list so far of news and activities of 2015 with tax policy relevance (no ranking involved):

1. Congress can alter our tax system via a lot of non-tax bills - here
2. IRS funding challenges - here 
3. Justice Kennedy called for a review of the 1992 Quill decision - here 
4. IRS disagreeing with a court decision via a proposed regulation - here 
5. Why not let the Internet Tax Freedom Act just expire - here
6. A growing amount of non-binding "guidance" from the IRS - here

Top Ten Items of Tax Policy Interest for 2015 - #6

Continuing with my list of ten news items and activities from 2015 that I think have particular tax policy relevance.  Today, for my sixth item is yet one more year with lots of informal, non-binding documents issued by the IRS in comparison to binding guidance.  Per my count aided by RIA Checkpoint, the IRS website and the US Tax Court website, is some data comparing 2015 and 1995 in terms of various administrative and judicial guidance issued.  It is missing cases by other federal courts, regulations and statutory (IRC) changes for these years. I may pursue all of this more later. Also, because I have not found a way to count them and it might not be possible, is how many new FAQs the IRS issued for 2015 and how many prior ones they modified. [For more on FAQs, see this paper by Robert Horwitz and me from 2012 which we presented to folks at IRS, Treasury, Nina Olson, and congressional tax staff in May 2012.]

Comparisons:

Document	2015	1995
Action on Decision (AOD)	2	16
General Counsel Memorandum (GCM)	0	3
Chief Counsel Advice (CCA)*	186	2
Field Service Advice (FSA)	0	185
Revenue Ruling	26	83**
Revenue Procedure	57	55
Notice	87	67
Fact Sheet	27	2
Regular Tax Court decision	31	64
Tax Court Memorandum decision	246	610
TC Summary Opinion	75	0

  *Does not include 5 Legal Advice Issued by Associate Chief Counsel, 31 Legal Advice Issued by Field Attorneys, and 21 Legal Advice Issued to Program Managers. The number noted is of CCAs released to the public. Per this IRS report for 2014, if 2015 is similar, there might be over 3,000 more CCAs that were not released such as due to privilege and confidentiality reasons. The number is not too helpful because perhaps prior year CCAs were sent to agents if pertinent to their question.

  **In 1985, there were 200 revenue rulings and for 1975, there were 568!

While the number of revenue rulings has dropped since 1995, the informal guidance  (CCAs and FSAs) is about the same.  But too many, particularly when they address something not otherwise addressed in binding guidance.

 

My focus is on the IRS. I included the Tax Court for additional comparisons of differences between 2015 and 1995.  Why so many more Tax Court rulings in 1995?  Perhaps because there were more audits by the IRS in 1995?  Perhaps there were fewer tax cases in District Court and Court of Federal Claims that year?  More research is needed here.

Policy concerns: Many of the CCAs involve legal areas where there is no other binding guidance. Yet, CCAs are not binding and can't be relied upon to avoid a penalty. The law section of the CCAs typically uses the IRC, regulations and cases which are binding and that might be helpful.  But if many of the CCAs could instead be revenue rulings or regulations, that would be very helpful to taxpayers and practitioners.  Here are a few from 2015 where something more binding would be helpful:

• §469(c)(7) Clarification – CCA 201504010 (1/23/15)
• Marijuana Business and §280E – Cost of Sales versus Period Expenses – CCA 201504011 (1/23/15)  
• Treatment of Excise Taxes Paid by Marijuana Business - CCA 201531016 (7/31/15)
• ERP Software and §174 – In CCA 201549024 (12/4/15) 

What do you think?

My list so far of news and activities of 2015 with tax policy relevance (no ranking involved):

1. Congress can alter our tax system via a lot of non-tax bills - here
2. IRS funding challenges - here 
3. Justice Kennedy called for a review of the 1992 Quill decision - here 
4. IRS disagreeing with a court decision via a proposed regulation - here 
5. Why not let the Internet Tax Freedom Act just expire - here