Thursday December 7, 2023
Companies May Repay Employee Student Loans
In IR-2023-152, the Internal Revenue Service (IRS) reminded employers and employees of an educational assistance program to help pay student loans.
IRS Commissioner Danny Werfel noted, "The IRS wants to remind both employers and employees about this special feature that can help with student loans. There is a limited window of time for this educational assistance program and the IRS wants to make sure employers do not overlook this option that can help businesses attract and retain workers."
For many years, educational assistance programs permitted employers to provide up to $5,250 per employee each year. However, between March 27, 2020 and December 31, 2025, the educational assistance includes payment of employee student loans.
The traditional educational assistance programs paid for books, equipment, supplies, fees and tuition for an employee. The expanded option to pay student loans enables the employer to make the payment directly to the lender of an employee.
Many employers are interested in attracting and retaining talented and qualified employees. If they do not have an educational assistance program, they may wish to create one and add the student loan payment as an employee benefit. The student loan payment may be an amount up to $5,250 per year, per employee.
As is true of most employee benefit programs, the plan must be fair to all employees and may not favor highly compensated staff. IRS Publication 970, Tax Benefits for Education, is a helpful resource because it explains the qualification for a student loan.
The IRS will conduct a free webinar on the payment of employee student loans at 2:00 PM Eastern Time on Thursday, September 14, 2023. Registration is available on IRS.gov.
Sen. Mark Warner (D-VA) supported the plan to pay down employee student loans. He stated, "As student loan repayments resume, employers should take full advantage of educational assistance programs that can be used to help pay student loan obligations for their employees. This benefit not only provides a pathway towards student debt relief for borrowers but also gives employers the ability to recruit and retain high-quality talent. I am grateful that the IRS is continuing to conduct meaningful outreach to ensure that both employers and employees are seizing this opportunity."
IRS Attacks Spendthrift Trust Tax Shelter
In legal memorandum AM 2023-006, IRS Associate Chief Counsel, Holly Porter, cautioned tax professionals about a new tax shelter. It should be noted that IRS legal memorandums may not be used as precedent.
The memorandum explains that promoters are incorrectly interpreting Section 643 when claiming that capital gains and extraordinary dividends of a business may be excluded from income.
The promoters of the tax shelter described a structure that is designed to dramatically reduce taxable business income. The promotional materials describe the trust as a "Non-Grantor, Irrevocable, Complex, Discretionary, Spendthrift Trust".
The trust is created by a third-party settlor. The business owner becomes a "Compliance Overseer" and has various powers to add and remove trustees and modify beneficiaries.
The business owner is not a beneficiary of the trust, but typically, a spouse or children are named as beneficiaries. The trustee has sole discretion to distribute income or principal to beneficiaries. The trust is designated a "spendthrift" trust. It must obtain an IRS Employer Identification Number (EIN) and file IRS Form 1041, U.S. Income Tax Return for Estates and Trusts.
The key strategy involved is for the taxpayer to sell the assets to the trust in exchange for a promissory note. This is frequently a "demand note" and may not have a specific term. The promoter materials do not mention a requirement for the note to bear adequate interest. The claim is made that the sale of assets to the trust is a nontaxable event. After the sale, the trust assets are leased back to the taxpayer to be used in his or her business.
The key goal of the plan is that the income produced by the trust is received from the business owner. Because income is distributed to the trust, the business owner claims that his or her income is reduced by the amount transferred to the trust. The trustee then allocates capital gain and extraordinary dividends to trust corpus and claims these amounts are nontaxable under Section 643(a)(3) which states, "gains from the sale or exchange of capital assets shall be excluded to the extent that such gains are allocated to corpus and not (A) paid, credited, or required to be distributed to any beneficiary during the taxable year."
In addition, the promoters claim that Section 643(a)(4) states that "if a fiduciary has the sole and absolute authority to designate something as extraordinary dividends or taxable stock dividends, and that designation is paid to the corpus of the trust and not subject to distribution, then it is not income to the trust according to Rule 643."
Section 643(a) defines "distributable net income (DNI)" and allows deductions to the trust for the appropriate amount. Section 643(a)(3) notes that capital gains allocated to corpus are excluded from DNI. In addition, extraordinary dividends are also excluded from DNI under Section 643(a)(4).
Reg. 1.643(a)-0 notes that DNI is not applicable except to determine the taxation of estates and trusts and the amounts taxable to beneficiaries. Its sole function is related to that determination. Section 651(b) notes that DNI is used to determine deductions from trust taxable income.
However, Section 641(b) states that a trust's taxable income is computed using the same methodology as that for individuals. Therefore, DNI will reduce the trust's taxable income, but it does not eliminate the concept of taxable income.
Section 643 exists to determine the modifications to taxable income based on distributions to beneficiaries. The applicable tax principles relate to distribution of capital gains and extraordinary dividends. While DNI deductions are permitted, "all of the income attributable to capital gains and extraordinary dividends must be reported by the non-grantor trust as income on Form 1041."
The basic failure of the claimed tax benefit is that Section 643(b) simply allocates deductions between the trust and the income recipients, but it does not eliminate the taxation of a non-grantor trust. The IRS urges all revenue agents to make certain that trusts report all taxable income, including capital gains and any income described as an extraordinary dividend.
Editor's Note: Creative promoters are always developing new tax theories. Unfortunately, there are taxpayers who do not seek the advice of prudent counsel and are vulnerable to implausible tax shelter schemes. It is important that all tax professionals understand the latest strategies and scams in order to protect their clients.
Crypto Seizures Surge in 2023
The IRS Criminal Investigation division regularly seizes assets as part of their tax investigation and prosecution process.
In fiscal 2019, the IRS seized approximately $700,000 in cryptocurrency. The seizures jumped to $100 million in 2020 and mushroomed to over $7 billion dollars in 2022. Even with dramatic declines in the value of many cryptocurrencies in 2023, the IRS seizures are substantially larger than 2022.
One of the considerations for the federal agencies that collect and confiscate assets is how to transfer cryptocurrencies and exchange them for U.S. dollars.
Kathy Enstrom, formerly the IRS Director of Operations, handled cryptocurrency seizures until 2021. She indicated that the IRS Criminal Investigation division attempted to create specific policies and procedures to handle cryptocurrency assets.
The goal of the IRS in seizing cryptocurrency is to create a logical and consistent process for liquidating the assets. The disposition requires a plan to manage the assets.
The initial strategy was to use "cold" digital storage and a chain-of-custody log. The Treasury Executive Office for Asset Forfeiture (TEOAF) would hold the assets until the forfeiture hearing before a federal judge. After the judge issued an order that the cryptocurrency has been forfeited, the U.S. Marshals Service (USMS) received the cryptocurrency. It used one of the cryptocurrency exchanges to convert the cryptocurrency to U.S. dollars. The USMS states, "The digital assets have public blockchains, and the exchanges have strict 'know your customer' and anti-money-laundering requirements for individuals utilizing their venue to purchase cryptocurrency."
Editor's Note: The federal government is aware that the sheer magnitude of the seizures could have an impact on cryptocurrency markets. For example, Bitcoin's current market capitalization is $504 billion. If the federal government engages in regular sales and sells up to $10 billion of Bitcoin, it is not likely that there will be a huge impact on cryptocurrency valuation. The USMS notes, "All assets managed and disposed of by the USMS, to include cryptocurrency assets, are valued at forfeiture and are liquidated promptly upon receiving proper authorization...without regard to current market conditions. Our goal is to dispose of assets in a timely manner at fair market value. Depending on the type and amount of cryptocurrency being liquidated, the USMS does take additional steps to ensure the market is not adversely impacted."
Applicable Federal Rate of 5.0% for September -- Rev. Rul. 2023-16; 2023-37 IRB 1 (15 August 2023)
The IRS has announced the Applicable Federal Rate (AFR) for September of 2023. The AFR under Sec. 7520 for the month of September is 5.0%. The rates for August of 5.0% or July of 4.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return. Charitable gift receipts should state, "No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property."
Published August 25, 2023
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