Dear tax professional:

Happy September! We hope you enjoy the long weekend and your Labor Day holiday. 

For those impacted by Hurricane Idalia, the IRS has announced tax relief.  Please see below for details.

As a reminder,  we have three conferences kicking off this month:

Please enjoy this week's e-briefing!

IRS Meets With FTA to Share New Guidance on Federal Taxability of State and Local Refunds, Payments

Guidance issues to inform taxpayers of federal income tax obligations pertaining to pandemic-era payments 

The IRS met with FTA on Wednesday, August 30, to discuss newly issued guidance regarding the federal taxability of state and local tax refunds, and certain other payments made to individuals by state or local governments. 

The agency previously provided guidance on state payments made in 2022 in a February 10 news release. 

Guidance is being issued as part of the IRS’s efforts to provide additional certainty to states and their residents regarding the federal income tax consequences of state payments made to taxpayers. In 2022, several states implemented programs to provide payments to certain individuals residing in their states.

Many of these programs were related, directly or indirectly, to the various consequences of the COVID-19 pandemic, and programs varied in terms of types of payments, payment amounts, and eligibility criteria. The February news release addressed the federal tax treatment of these 2022 payments. 

Notice 2023-56 describes certain types of state payments to individuals and the federal tax treatment of those payments. This updates the previous guidance, which only described the taxability of payments made during 2022. The Wednesday notice also requested comments regarding the application of the rules described in this notice, as well as specific aspects of state payment programs or additional situations on which federal income tax guidance would be helpful.   

Most taxpayers receiving state tax refunds do not have to include the state tax refund in income for federal tax purposes. Generally, taxpayers who choose the standard deduction on their federal income tax returns do not owe federal income tax on state tax refunds.  

Most taxpayers claim the standard deduction. For instance, in tax year 2021, 90% of individuals claimed the standard deduction instead of itemizing their deductions.  

Taxpayers who itemize their deductions on their federal income tax returns and receive a state tax refund must include the refund in income only if they deducted the state tax paid. Because of the $10,000 limit on itemized deductions for state income and property taxes, some itemizers are not able to deduct all the state taxes they paid and do not need to include a refund in income. 

Spillover payments under 2022 programs covered by IRS News Release IR-2023-23

Some of the 2022 programs included in IRS news release IR-2023-23 provided for certain state payments under the program to be made in early 2023.

To the extent the news release provided taxpayers can exclude the state payment received in 2022 from federal income, this treatment also applies in 2023. 

This means taxpayers who did not get a payment under the program during 2022 may exclude from federal income a state payment provided under the 2022 program but received in 2023. 

State general welfare programs

Payments made by states under legislatively provided social benefit programs for the promotion of the general welfare are not included as income on an individual recipient’s federal income tax return.   

To qualify for the general welfare exclusion, state payments must be paid from a governmental fund, be for the promotion of general welfare (that is, based on the need of the individual or family receiving such payments), and not represent compensation for services.  

Determining whether payments qualify for this exclusion is a complex and fact-intensive inquiry that depends on many considerations. Notice 2023-56 provides an example of a general welfare situation. 

Joe Noland and Steve Gentry Recipients of 2023 Charlie Mills Lifetime Achievement Award

Award recognizes those dedicating careers to tobacco tax administration, enforcement

At the 97th FTA Tobacco Annual Conference, the prestigious Charlie Mills Lifetime Achievement award was presented to Joe Noland, retired from the State of Ohio; and Steve Gentry, retired from RJ Reynolds Company. 

The Charlie Mills Lifetime Achievement Award was created by the FTA Tobacco Tax Section to be presented to a career government or industry employee who has dedicated their career to tobacco tax administration and enforcement.  Charles Mills was the Director of Petroleum Alcohol Tobacco Tax Unit for the New York State Department of Taxation and Finance who lost his life on September 11, 2001, while helping to evacuate others out of World Trade Center Tower 2.   

Tax Administrators on Front Lines of Technology Modernization

UIC blogpost by FTA's Ryan Minnick shares how SALT agencies are helping lead the way

A recently published University of Illinois Chicago blogpost by contributing writer and FTA Chief Operating Officer Ryan Minnick highlights the ways state and local tax administrators are at the forefront of technology.

Tax administrators throughout the country are deploying a wide range of applications designed to protect and assist those they serve. Whether it be customer service chatbots or the latest security application to protect personal identifiable information, tax agencies are often on the front lines designing the next great system.  

Have you recently published a tax article or contributed to scholarly research? If so, FTA would like to share your work with your colleagues. Send articles to: newsletter@taxadmin.org.

FTA Leaderboard Video Series

This week's featured interview: Wisconsin DOR Secretary Peter Barca

Secretary Barca joined the FTA Board in 2019, and his one-year term as president runs through June 2024.  

Wisconsin Governor Tony Evers in 2019 appointed then Wisconsin State Assembly Rep. Barca to lead the Wisconsin Department of Revenue. President Barca’s career includes his time serving in the Wisconsin state legislature between 1985 to 1993, returning in 2009 and serving most of his second tenure as Assembly Minority  Leader. After his service in the U.S. House of Representatives, he served as the Midwest Administrator of the U.S. Small Business Administration and then as the first national leader of the Regulatory Fairness Commission.  

IRS Announces Administrative Transition Period for New Roth Catch-Up Requirement

Catch-up contributions still permitted after 2023

These announcements were included in Notice 2023-62, now posted on IRS.gov. This notice provides initial guidance for section 603 of the SECURE 2.0 Act, enacted in December 2022. Under that provision, starting in 2024, the new Roth catch-up contribution rule applies to an employee who participates in a 401(k), 403(b) or governmental 457(b) plan and whose prior-year Social Security wages exceeded $145,000.

The administrative transition period will help taxpayers transition smoothly to the new Roth catch-up requirement and is designed to facilitate an orderly transition for compliance with that requirement. The notice also clarifies that the SECURE 2.0 Act does not prohibit plans from permitting catch-up contributions, so plan participants who are age 50 and over can still make catch-up contributions after 2023.

The Treasury Department and the IRS plan to issue future guidance to help taxpayers, and the notice describes several positions that are expected to be included. In addition, the notice invites public comment on the matters discussed in the notice and suggestions for the future. The notice provides details on how to submit comments.

Register Now for the NESTOA Conference

Join us September 10–13 in Wilmington, Delaware

The Northeastern States Tax Officials Association (NESTOA) and FTA invite you to join us for the NESTOA 2023 Annual Conference. This year's event will be held at the Hotel Du Pont in Wilmington, Delaware. Full details and registration available on the NESTOA Annual Conference page.  

Motor Fuels Section Annual Conference Registration Open

Join us in Orlando, Florida September 17–20

The 2023 FTA Motor Fuels Annual Conference of the FTA Motor Fuels Section will be held at Rosen Plaza in Orlando, Florida on September 17–20, 2023. The meeting consists of general session topics of interest to state motor fuel tax administrators and industry. 

This is a forum for states to share their best practices and to hear about the latest and greatest in improved processes, compliance innovations, ideas, and networking.  

Revenue Estimation and Tax Research Conference

Join us September 30–October 4 in Salt Lake City, Utah

If you are a revenue estimator, forecaster, tax analysis, or just interested to tax policy topics, register now for the Annual FTA Revenue Estimation and Tax Research Conference in Salt Lake City at the Sheraton Hotel - Downtown from September 30 through October 4.  Full details, including registration, are available on the Revenue Estimation and Tax Research Conference page.    

U.S. Appeals Court Upholds Denial of Summary Judgment in Tax Penalty Case

Case centers around former CFO regarding liability for trust fund recovery penalties

The U.S. Court of Appeals for the Ninth Circuit, in Richard W. York v. United States, upheld a bankruptcy court’s denial of summary judgment to a former CFO who later entered a stipulated judgment with the IRS regarding his liability for trust fund recovery penalties while retaining his right to appeal.

The court held the court had jurisdiction over the appeal and the lower court correctly denied summary judgment.

The facts show the taxpayer is the former CFO of Convergence Ethanol Inc. and its subsidiary, California MEMS USA Inc. He was hired primarily to “effect compliance with SEC filing requirements” and was not expected to be involved in the day-to-day financial operations or accounting of the corporation or any of its subsidiaries. Each entity had an “experienced CPA” that would be the controller of the finances. The taxpayer ranked higher than any of the controllers but lacked the authority to issue direct orders to them, set their salaries, or terminate their employment. The controller for California MEMS oversaw the subsidiary’s bills.

When checks were required, the controller would prepare them, so the taxpayer would just have to sign. Any financial issues would be discussed with Convergence’s CEO, who had final approval of all payments. Under the company’s “approval matrix,” the controller had authority to make payroll tax payments under $10,000, while the taxpayer could make payments up to $50,000. However, the taxpayer didn’t have the password to the electronic account the controller used to pay taxes.

In 2004 the taxpayer learned that California MEMS owed unpaid payroll taxes and he told the controller not to make payroll payments unless the corresponding payroll tax deposits could also be made. The matter was later resolved, and he did not become aware of any payroll tax issues again until 2007. Convergence’s financial troubles came to a head in December 2007, when it and its subsidiaries ceased operations and were all in chapter 7 bankruptcy proceedings. The taxpayer resigned from his positions on December 31, 2007. The IRS later found that California MEMS had failed to pay over the payroll taxes for portions of 2007 and 2008 and in 2011 assessed a section 6672(a) penalty against the taxpayer personally for the unpaid taxes.

He filed for chapter 13 bankruptcy in August 2016 and the IRS later submitted a proof of claim against him. The taxpayer appealed that action, arguing that he was not a “responsible person” for the purposes of section 6672(a). He also disputed whether the company owed all the taxes the IRS claimed.

Both parties filed motions for summary judgment.  The bankruptcy court granted his motion regarding the remaining 2008 taxes but denied both his motion and the government’s regarding the 2007 taxes, concluding that the record was not clear and that a trial would help determine whether the taxpayer could be deemed a responsible person.

The taxpayer subsequently agreed to a stipulated judgment allowing the government’s claim but made it clear on the record that his consent was subject to his stated intention to appeal the judgment on the grounds that his summary judgment motion should have been granted. 

The bankruptcy court entered the judgment in June 2019 and the taxpayer then appealed to the U.S. District Court for the Central District of California which concluded that it had jurisdiction to hear the matter under 28 U.S.C., section 158 because the bankruptcy court’s judgment was sufficiently final.  The court affirmed the summary judgment denial, finding material facts were still at issue. This appeal was filed.

The court concluded that the normal rule against appealing a consent judgment did not apply because the circumstances made it clear that the taxpayer intended to preserve his right to appeal, and his reservation of that right wasn’t “fundamentally inconsistent” with his consent. The court said the bankruptcy court had correctly concluded that the taxpayer failed to show that a rational trier of fact could not reasonably find in the government’s favor, viewing the record in the light most favorable to the government.

The court concluded that the taxpayer could reasonably be found to be a responsible person because he had the effective power to pay the taxes, even if he wasn’t the person who had primary control over the finances. The court also found that the taxpayer could be seen as willful in the company’s failure to pay over taxes even if he was not fully aware that the payroll taxes hadn’t been paid over. One justice dissented, arguing that the former CFO could not appeal the denial of summary judgment after the court entered a final stipulated judgment.

This article first appeared in FTA’s State Tax Highlights newsletter. Email: newsletter@taxadmin.org to subscribe.  

Treasury, IRS Issue Proposed Regulations on Prevailing Wage, Apprenticeship Requirements for Increased Energy Credit or Deduction Amounts 

Proposed regulations would provide guidance to taxpayers intending to claim the increased credit or deduction amounts

The U.S. Treasury Department and IRS this week issued proposed regulations related to the increased tax credit or deduction amounts for clean energy facilities and projects if taxpayers satisfy certain prevailing wage and registered apprenticeship (PWA) requirements. 

Generally, these new proposed rules provide guidance on the PWA requirements, enacted as part of the Inflation Reduction Act, for certain green energy facilities or projects. 

The Inflation Reduction Act provides increased credit or deduction amounts that generally apply for taxpayers who satisfy certain PWA requirements regarding the construction, installation, alteration, or repair of a qualified facility, qualified property, qualified project, qualified equipment, or for certain energy facilities. 

Under the tax law, the increased credit or deduction amount is generally equal to the base amount multiplied by five if the taxpayer satisfies the PWA requirements. There are certain limited exceptions where a taxpayer may be eligible for an increased credit amount without satisfying the PWA requirements. 

The proposed regulations would provide guidance to taxpayers intending to claim the increased credit or deduction amounts and those intending to transfer increased credit amounts. Additionally, the proposed regulations would provide guidance for taxpayers that initially fail to satisfy the PWA requirements but seek to cure the failure by complying with certain correction and penalty procedures. Finally, the proposed regulations would provide rules concerning specific PWA record-keeping and reporting requirements. 

Also today, the IRS released frequently asked questions and Publication 5855 which is an overview of the prevailing wage and apprenticeship requirements and the applicable credits.  

Treasury and the IRS previously provided guidance on the PWA requirements in a news release, IR-2022-208, and in Notice 2022-61. 

Further information about tax benefits from the Inflation Reduction Act may be found on IRS.gov. 

Those Impacted by Idalia Qualify for Tax Relief

October 16 deadline, other dates postponed to February 15

The IRS announced tax relief for individuals and businesses affected by Idalia in parts of Florida. These taxpayers now have until Feb. 15, 2024, to file various federal individual and business tax returns and make tax payments. 

The IRS is offering relief to any area designated by the Federal Emergency Management Agency (FEMA). Currently, 46 of Florida’s 67 counties qualify. Individuals and households that reside or have a business in these counties qualify for tax relief, but any area added later to the disaster area will also qualify. The current list of eligible localities is always available on the disaster relief page on IRS.gov. 

Filing and Payment Relief

The tax relief postpones various tax filing and payment deadlines that occurred from Aug. 27, 2023, through Feb. 15, 2024, (postponement period). As a result, affected individuals and businesses will have until Feb. 15, 2024, to file returns and pay any taxes that were originally due during this period. 

Chief Economist

State of California Franchise Tax Board

Director of Economic Research and Tax Policy

Federation of Tax Administrators

Open until September 15, 2023

Director of Excise and Miscellaneous Tax Programs

Federation of Tax Administrators

Open until September 15, 2023

FTA has announced a number of dates for its 2023 conferences and symposia.  Be sure to mark your calendars!  Registration information is available for many of the conferences.  Please visit the FTA website for the full calendar.

Revenue Estimation and Tax Research Conference
September 30–October 4
Salt Lake City, UT

Compliance Conference
December 3–6
Tucson, AZ

Motor Fuel September Uniformity
September 15 and 16
Orlando, FL

Motor Fuel Annual Meeting
September 17–20
Orlando, FL

NESTOA Annual Meeting
September 10–13
Wilmington, DE

WSATA Annual Meeting
October 8–11
Reno, NV