Any new info on Notice 2021-49 and ERC

Technical topics regarding tax preparation.
#1
Posts:
2091
Joined:
21-Apr-2014 12:31pm
Location:
HAWAII
I have one client who wants to just amend their returns to comply with Notice 2021-49, but decided to wait a little bit to see if there would be any amendments to it. Now that the dust is settling a bit around it, are there any ramblings that we should be paying attention to regarding the possibility of a change? I think an election year would probably speed that process along, but we have what we have.
 

#2
Posts:
2091
Joined:
21-Apr-2014 12:31pm
Location:
HAWAII
Just bumping this to the top. Have a great holiday weekend everyone.
 

#3
Posts:
2771
Joined:
22-Apr-2014 1:34pm
Location:
North Carolina
Haven’t heard any more since my Congressmen’s offices called to discuss. I’m holding off amending for a while. Discussed with clients and decided to wait, knowing we may have to amend tax returns down the road.
 

#4
Posts:
49
Joined:
13-Jan-2015 8:43am
Location:
US
https://www.currentfederaltaxdevelopmen ... ce-2021-49

https://www.currentfederaltaxdevelopmen ... ick-primer

A couple of great articles while you wait. If a fix doesn't come in the upcoming budget reconciliation bill, I doubt we will see any action on the topic. Too little getting through Congress these days.
 

#5
Posts:
23
Joined:
15-Feb-2015 12:08am
Location:
WV
Isn't Notice 2021-49 contrary to the double counting restriction in 267(c)(5)? ... stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock.
 

#6
Posts:
3222
Joined:
21-Apr-2014 8:25am
Location:
Michigan
No. That just says that if you constructively own on the basis of 267(c) we don’t go through the exercise again to see who constructively own based on your constructive ownership.

I’ll give you an example a man owns an s Corp. His son constructively owns the same. That rule just says we don’t apply 267(c) again to the son and include those determined to constructively own from the sons ownership ( which was not actual just constructive). If you read 51i this rule doesn’t change anything.
 

#7
Posts:
23
Joined:
15-Feb-2015 12:08am
Location:
WV
But isn't the Notice, in your example, applying the son's constructive ownership back to the father? Instead of stopping with the son, the Notice takes the son's indirect ownership (which he got from the father) and applies it to the father, a form of double counting.
 

#8
Posts:
1362
Joined:
22-Apr-2014 9:07am
Location:
Chicago, IL
vdichiac wrote:But isn't the Notice, in your example, applying the son's constructive ownership back to the father? Instead of stopping with the son, the Notice takes the son's indirect ownership (which he got from the father) and applies it to the father, a form of double counting.


This is exactly the argument I was making in this other discussion. While it is explained there very well and appears to probably be accurate, I still disagree with this and fully expect more changes to come....

https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=22642
 

#9
Posts:
23
Joined:
15-Feb-2015 12:08am
Location:
WV
Thanks for the link. I agree with you, Nightsnorkeler, that the attribution should be applied once. Unless I miss something, that's what 267(c) says, and 267(c) is the law. An IRS notice is just an interpretation. This one reminds me of how badly the IRS botched it with PPP forgiveness in Notice 2020-32. It's as if they do contortions to jack up taxes. That's not their job.
 

#10
dave829  
Account Deactivated
Posts:
1482
Joined:
9-Jan-2018 9:28pm
Location:
California
I have been advising my clients to ignore the portion of Notice 2021-49 that conflicts with the Code because the Code takes precedence over an IRS notice.
 

#11
Posts:
3222
Joined:
21-Apr-2014 8:25am
Location:
Michigan
I have already been in your camp. I have done a deep dive on this topic and came to agree with the notice as being the most likely correct interpretation. However, if I wanted to argue that the Notice was wrong claiming 267(c)’s being applied twice is not the best defense against the Notice. The code reference that bars it from being applied twice is for something else. What you want to do is make some other type of argument that basically bars the actual owner from being considered related to an actual owner or constructive owner. This argument is the best argument. With that said the best argument is unlikely to prevail because of the Code and what it says.
 

#12
Posts:
23
Joined:
15-Feb-2015 12:08am
Location:
WV
Terry, I agree the IRS has made this difficult to counter. Its interpretation is contrived but can't be proven wrong. Your suggestion about actual vs constructive owner has possibilities. Reg 1.51-1e1(iii) says an individual must have a relationship to a shareholder. The question is whether a constructive owner is considered identical to an actual shareholder.
 

#13
Posts:
3222
Joined:
21-Apr-2014 8:25am
Location:
Michigan
It does have possibilities of being correct in theory, but I believe most courts would be required to hold against such a positioon because deductions and credits are construed narrolowly. This rule of narrow construction means you have to do better than just have a plausible argument, you have to be excplicitly identified in the law as someone who is supposed to benefit from the credit or deduction. That's whythe situation is hopeless. Those who have been writing their congressman have the right idea. Unfortunately, it is because of this i believe the "best argument" has a less than 20% chance of prevailing and would need to be disclosed.
 

#14
Posts:
5698
Joined:
21-Apr-2014 7:21am
Location:
The Land
The question is whether a constructive owner is considered identical to an actual shareholder.


And the answer is “yes.” As per the Notice:

Section 51(i)(1)(A) includes a parenthetical at the end of the subparagraph stating that an individual’s ownership is determined with the application of section 267(c) of the Code.

This isn’t a new provision. It’s from the WOTC. Terry is seeing things clearly here. As a technical matter, IRS is correct.

This issue has already been beaten to death in other threads. The IRS “interpretation” in the Notice doesn’t conflict with the Code.
 

#15
Posts:
23
Joined:
15-Feb-2015 12:08am
Location:
WV
The notice doesn't say shareholder, the way it does in the regulation. And 267(c)(5) doesn't consider a constructive owner as identical to an actual owner. It's no more contrived than the IRS position. Yes, this issue has been beaten to death, but it's not over. Many expect Congress to correct this, and if not Congress, courts.
 

#16
Posts:
49
Joined:
13-Jan-2015 8:43am
Location:
US
vdichiac wrote:The notice doesn't say shareholder, the way it does in the regulation. And 267(c)(5) doesn't consider a constructive owner as identical to an actual owner. It's no more contrived than the IRS position. Yes, this issue has been beaten to death, but it's not over. Many expect Congress to correct this, and if not Congress, courts.


Congress is the only hope for an Owner ERC "fix" or exception. The tax code is the law. In this area the law is clear and unambiguous (even if it is complex to get the the result). There is no basis for a court to determine otherwise. A court can't do a thing about it.

Here is Justice Thomas in the Supreme Court Case of CONN. NAT'L BANK v. GERMAIN(1992):
We have stated time and again that courts must presume that a legislature says in a statute what it means and means in a statute what it says there. See, e.g., United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 -242 (1989); United States v. Goldenberg, 168 U.S. 95, 102 -103 (1897); Oneale v. Thornton, 6 Cranch 53, 68. When the words of a statute are unambiguous, then this first canon is also the last: "judicial inquiry is complete." Rubin v. United States, 449 U.S. 424, 430 (1981); see also Ron Pair Enterprises, supra, at 241.

Anyone out there saying "It's up to the court to decide" on Owner ERC - well, they are just trying to save face in front of their CPE audience because they ignored the Owner ERC problem when it came to light early in the year. Only Congress can give us an exemption now. I doubt they will get it done. It's not in the infrastructure bill or the tax texts that came out of the Ways & Means committee this week. In fact, they added two NEW references to 51(i)(1) for related party disallowance in other areas (this is the reference which killed Owner ERC btw). So my hopes are not high at this stage.
 

#17
dsocpa  
Posts:
821
Joined:
5-May-2014 11:15am
Location:
Maryland
I am taking the same position as Dave829. I agree it is up to Congress to fix. Similar to the PPP and deductible expenses. Otherwise I see a heavily litigated interrpretation. The IRS was asked the question regarding the language in CARES Act. The ERC has been a part of COVID small business reflief for over a year now and they just got around to issuing the notice to provide guidance we, the AICPA and countless others have been requesting. I think the IRS was backed into a corner and told by someone upstaris to “do it”. A collegeague called the author on the notice, who agreed it was basically, poorly written, albeit he did not use those exact words, he apologized profusely.
BTW, anyone have clients who have received the credit based on a 941X filing? I have a couple going back to Q1-2 2020, filed in March 2021. The clients have yet to receivethe funds. Which leads to my 2nd point. By the time the IRS gets around to opening the mail anything could happen. Also, how many owners filed the credit for themselves and have living relatives. They may have filed a form 941x, and 1120/1120S, or other business entity return, now an amended 941X will need to be filed, an amended business return, and depending, an amended 1040, and then returning the funds. At this point that could be generation away.
 

#18
Posts:
23
Joined:
15-Feb-2015 12:08am
Location:
WV
I'm not optimistic about Congress at this point. I emailed three and got one response. The one response mixed up my question with one about 1099 filings. Probably a computer generated screw up. I would like to see a court deal with this. Is a purely constructive owner deemed to be an actual (direct or indirect) shareholder for purposes of creating new, banned relationships? I hope some courts would consider such an interpretation (living relative rule), as courts have said in other situations: contrary to the natural and plain meaning of the statute; or an absurd result; or a curious, narrow, hidden sense that nothing but the exigency of a hard case and ... ingenuity and study ... would discover.
 

#19
dsocpa  
Posts:
821
Joined:
5-May-2014 11:15am
Location:
Maryland
Agree 100%
 


Return to Taxation



Who is online

Users browsing this forum: JoJoCPA, rkrcpa, UnlicensedTaxPro and 108 guests