The Newest Time Machine

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Yesterday in Part 1Monte A. Jackel, discussed issues relating to the extension of deadlines due to COVID-19. In today’s post Monte considers whether in light of retroactive law changes in CARES the IRS can force a partner to amend a return when the original tax return filed was correct. Les

Revenue Procedure 2020-23 (originally discussed on PT by Marilyn Ames) sets forth the terms and conditions for a partnership subject to the BBA audit regime to file an amended tax return for the 2018 and 2019 tax years. The revenue procedure provides welcome relief for cases where the retroactive law changes allowing 5-year loss carrybacks and the technical correction for QIP (qualified improvement property) would not otherwise have been available because section 6031(b) generally disallows amended returns by such partnerships; AARs are the preferred route. 

The revenue procedure, however, assumes that all partners would favor such retroactive relief. However, that may not always be the case. This brings to the forefront the issue of whether one or more partners of such a partnership that wants to file an amended form 1065 must also ensure that all of its partners file amended form 1040s. That is not directly addressed in the revenue procedure. There is only a reference to section 6222 and the amended form 1065 substituting for the original form 1065. This strongly suggests that the IRS believes that the partners have a legal duty to file amended form 1040s. 

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Revenue Procedure 2020-25 sets forth the options for taxpayers, including partnerships, to obtain relief due to the retroactive law change making QIP eligible for bonus depreciation under section 168(k). This revenue procedure essentially provides for amended forms 1040 or 1065 or automatic changes via a form 3115 to obtain relief due to the retroactive QIP change in the law. The revenue procedure assumes, without citing any supporting law, that when the law relating to a timing of income statute, such as section 168(k), is retroactively changed by Congress, that the taxpayer is now using an impermissible method of accounting. There does not appear to be any law that expressly supports that treatment although it may be the correct policy result. 

Further, there does not appear to be any law that expressly supports mandating the filing of an amended tax return where the original return  was true and correct at the time it was filed. Both reg. §§1.451-1(a) and 1.461-1(a)(3) state that to correctly treat an item of income or deduction in a different tax year than originally reported, the taxpayer “should”, if within the period of limitations, file an amended return. The word “shall” is not in the regulations; only “should”. (See, also, reg.§1.453-11(d) (an amended return for an earlier year “may” not “must” be filed.)

Further, under sections 6662 and 6694, the taxpayer tests a position of substantial authority either at the end of the tax year or when the tax return is filed, and the return preparer tests the level of authority when the tax return is filed. And, at those times, the method of accounting for QIP over a long useful life was the only permissible method to use. The retroactive law change does not change that. And neither Circular 230 or the ABA model rules of professional conduct change that result either.

If the taxpayer does not want to amend either a form 1040 or a form 1065 and the government cannot force the taxpayer to amend its tax return, what is the government remedy? There has been no change in method initiated by the taxpayer and the taxpayer properly adopted the original method and never changed that method. How is the government to force the taxpayer from the retroactively determined impermissible method to the now permissible method? And AARs are voluntary. It is not uncommon for revenue procedures to mandate accounting method changes where there is a prospective change in the law. And, at times, accounting method changes have been mandated (such as the Rule of 78s issue in the 1980s) where the method change applies to a tax year but a return for the prior year may or not have been already filed before the mandate to change (the issue is not discussed). However, I am not aware and could not find any authority that deals with a statutory retroactive law change and applying that change to a prior year where a true and correct tax return containing the prior treatment has already been filed. 

If the taxpayer  cannot be forced off the 39-year method, what does the taxpayer report for future years? Zero or 1/39? If the property is sold after year one but before year 39, section 1245 will only recapture the depreciation actually taken. It would seem that the duty of consistency would mandate continuing to depreciate over a 39-year period although the same tax adviser for year one may not be able to continue to advise the taxpayer because that person would arguably be perpetuating an error. 

The solution may be to mandate the filing of an amended return because the government can only collect from the partnership an imputed underpayment spread over the remaining years in the 39-year period because presumably there is no underpayment in year one by imposing bonus depreciation in that earlier year. But forcing an amended return will create a huge quagmire.

AndA, as noted earlier, what if one or more partners do not want to amend their 1040s but the partnership does amend its form 1065 under Rev. Proc. 2020-23? This revenue procedure does reference the duty to file consistent returns under section 6222, but is this to be read as mandating the filing of an amended tax return? It seems so but doing that would be an issue of first impression to me under existing law. A true time machine.

Comments

  1. This article is an excellent foundation for springboarding into other questions such as the CARES retroactive changes to §461(l) excess business (for 2018 and 2019) and §172 NOLs (for 2018 and 2019) (and, perhaps, to some extent, the retroactive changes to §163(j) (for 2019).

    The §461(l) CARES changes are forced on us (not only deleting the rules for 2018, 2019 and 2020, but also the tweaks to the definitions of business income for wages and capital gains arising in the business context). Do these changes mandate an amended return?

    By contrast, IRS’s guidance (Rev. Proc. 2020-24 (04/09/20)) of CARES changes to §172 does not appear to mandate waiving the NOL carryback under §172(b)(3) on an amended 2018 or 2019 return. Instead, waiving an NOL carryback appears to be doable via a statement(s) attached to the 2020 return.

    The CARES retroactive change to §163(j) to 2019 involves an apparently mandatory 50% (of ATI) computation, which one can elect out of back to 30%. The question is (if the 2019 return has already been filed), whether an amended return is required to hop out of the 50% computation.

    In addition, CARES §2306(a) inserts new §163(j)(10)(A)(ii) which allows half of 2019’s excess business interest expense carryover from a partnership to be deducted in 2020, regardless of (excess taxable) 2020 income from the partnership. If a partner does not want this rule to apply, the partner must elect out. If the 2019 return has already been filed, is an amended return required?

    One may envision inquiries such as Monte Jackel’s excellent (“Time Machine”) piece into each of the above contexts as well.

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