Top Tax Developments of 2024

(Parker Tax Publishing January 2025)

The November elections set the stage for tax legislation in 2025, as many provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) (Pub. L. 115-97) are set to expire this year. In addition, the IRS continue to issue guidance regarding clean energy credits, changes to the rules for retirement plan rules, and other topics. In addition, courts issued important decisions on tax issues, including three Supreme Court decisions potentially impacting tax practitioners.

The following are some of the top tax developments of 2024.

November Victory Gives Republicans Control Over TCJA Extension

By winning the White House and securing majorities in the House and Senate, Republicans will have the power to enact tax legislation in 2025 using the budget reconciliation process. Many of the TCJA's expiring provisions are expected to be extended or made permanent. For individuals, these provisions include the higher standard deduction, lower tax brackets, and the elimination of personal exemptions and many itemized deductions. For businesses, the law could include the restoration of full bonus depreciation and the immediate deduction for research and development expenses, as well as an extension of the Code Sec. 199A qualified business income deduction.

In addition, various other tax proposals from Trump's campaign could be enacted, such as exemptions for overtime pay, tips, and social security benefits, and a deduction for interest on auto loans. In addition, an increase to the limit on the deduction for state and local taxes has been discussed. Some of the clean energy credits enacted by the Inflation Reduction Act of 2022 (Pub. L. 117-169) - in particular, the credits for purchasing new or previously-owned clean vehicles - could be curtailed or repealed. But with narrow majorities and many competing priorities, the ultimate shape and timing of the bill remains to be seen.

IRS Continues to Issue Guidance on Clean Energy Credits

Throughout 2024, the IRS continued to issue guidance relating to the clean energy credits enacted by the Inflation Reduction Act. Some of the more high-profile items were final regulations on transfers of clean vehicle credits, proposed regulations and other guidance on the energy efficient home improvement credit, and final regulations on elective payments of clean energy credits.

In May, the IRS issued final regulations (T.D. 9995) regarding the credits for purchasing new or previously-owned clean vehicles under Code Sec. 30D and Code Sec. 25E, respectively. The final regulations provide guidance to taxpayers who purchase qualifying vehicles and wish to transfer the credit amount to an eligible dealer in exchange for a purchase price reduction. The final regulations also provide guidance for dealers to become eligible entities to receive advance payments of the new or previously-owned clean vehicle credits and rules regarding recapture of the credits.

In October, the IRS issued proposed regulations (REG-118264-23) regarding the energy efficient home improvement credit under Code Sec. 25C (Section 25C credit), which is a credit for 30 percent of the cost of qualifying home improvements, up to a maximum of $3,200. The proposed regulations provide general rules for the Section 25C credit, including how to calculate the credit and the types of property that qualify for the credit. In Announcement 2024-19, the IRS addressed the federal income tax treatment of amounts paid toward the purchase of energy efficient property and improvements under the Department of Energy's Home Energy Rebate Programs. Specifically, the IRS clarified that such rebates will be treated as purchase price adjustments for tax purposes and are therefore not includable in the purchaser's gross income under Code Sec. 61.

In T.D. 9988, the IRS issued final regulations that implement the provisions of Code 6417 as enacted by the Inflation Reduction Act. Code Sec. 6417 allows an "applicable entity" to make an election with respect to certain clean energy credits to be treated as making a payment of federal income tax equal to the amount of the such credit. Under Code Sec. 6417, elective payment elections are generally available only to "applicable entities," which generally means tax-exempt organizations and government or Tribal-owned entities. However, entities that are not applicable entities, including for this purpose partnerships and S corporations, can elect to be treated as an applicable entity for the limited purpose of making an elective payment election with respect to the credits for (1) carbon oxide sequestration under Code Sec. 45Q, (2) production of clean hydrogen under Code Sec. 45V, and (3) advanced manufacturing production under Code Sec. 45X. The final regulations issued in T.D. 9988 provide the rules for elective payments, including definitions and special rules applicable to partnerships and S corporations and regarding repayment of excess payments.

Final Regs Implement Statutory Changes to Rules for Required Minimum Distributions

In T.D. 10001, the IRS issued final regulations relating to required minimum distributions (RMDs) from qualified plans under Code Sec. 401(a)(9) that updated the regulations to reflect changes made by the SECURE Act of 2019 (Pub. L. 116-94) and the SECURE 2.0 Act of 2022 (Pub. L. 117-328).

Under Code Sec. 401(a)(9)(C), as amended by the SECURE Act and the SECURE 2.0 Act, the required beginning date for RMDs for an employee (other than a 5-percent owner or IRA owner) is April 1 of the year following the later of the year in which the employee attains the "applicable age" or the year in which the employee retires. In the case of an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033, the applicable age is 73. In the case of an individual who attains age 74 after December 31, 2032, the applicable age is 75. For a 5 percent owner or an IRA owner, the required beginning date is April 1 of the calendar year following the calendar year in which the individual attains the applicable age, even if the individual has not retired.

The final regulations retain the "10-year rule" in the proposed regulations, which provides that a beneficiary of a plan participant who died on or after their required beginning date must receive the participant's entire interest within 10 years of the participant's death. In comments, practitioners stated that no distributions should be required until the 10th year, regardless of whether the participant died before or after their required beginning date, but the IRS disagreed with those comments and retained the proposed rule in the final regulations.

IRS Issues Final Regulations on Reporting of Digital Asset Transactions

In T.D. 10000, the IRS issued highly anticipated final regulations on determining amount realized and basis for digital asset transactions as well as gross proceeds and basis reporting by brokers of digital assets. As a result of the final rules, custodial brokers of digital assets will begin issuing Form 1099-DA, Digital Asset Proceeds From Broker Transactions, in 2025 to report gross proceeds from digital asset transactions. Beginning in 2026, such brokers will also need to report cost basis for digital asset transactions. Final regulations issued in T.D. 10021 generally extend these reporting requirements to non-custodial (DeFi) brokers beginning in 2027.

In Rev. Proc. 2024-28, the IRS provided taxpayers with safe harbor guidance under Code Sec. 1012(c)(1) regarding how to transition from a universal or multi-wallet basis allocation methodology to a wallet-by-wallet or account-by-account basis methodology under the final regulations beginning in 2025.

Supreme Court Decides Tax Issues; Sets Forth New Standard For Agency Rulemaking

In 2024, the Supreme Court issued opinions deciding international and estate tax disputes. The Court also revisited its longstanding precedent regarding judicial review of agency statutory interpretations and set forth a new standard for agency rulemaking.

In Moore v. U.S., 2024 PTC 220 (S. Ct. 2024), the Court held that the Mandatory Repatriation Tax (MRT) under Code Sec. 952, which attributes the realized and undistributed income of an American controlled foreign corporation (CFC) to the entity's American shareholders and then taxes the American shareholders on their portions of that income, does not exceed Congress's constitutional authority. In Moore, taxpayers who were U.S. shareholders of a CFC that generated a great deal of income but never distributed it, were taxed on their pro rata share of the CFC's accumulated income under the MRT. The taxpayers argued that the MRT was unconstitutional as an unapportioned tax on their shares of the CFC's stock. After a district court dismissed their challenge to the MRT, and a unanimous panel of the Ninth Circuit affirmed the dismissal, the taxpayers appealed to the Supreme Court. Affirming the Ninth Circuit, the Court held in a 7-2 decision that the MRT is a constitutional tax that operates the same basic way as Congress's longstanding taxation on partnerships, S corporations, and subpart F income. The Court did not, however, decide the broader issue of whether realization is a requirement for the imposition of income tax.

In Connelly v. U.S., 2024 PTC 196 (S. Ct. 2024), the Court weighed in on the valuation of stock in a closely-held corporation for estate tax purposes under Code Sec. 2031. This case involved a building supply company owned by two brothers that purchased life insurance policies on each brother to redeem his shares in the event of his death. When one brother died, the company bought his shares for $3 million using the insurance proceeds. On the estate tax return, the company's shares were valued by excluding the $3 million in insurance proceeds on the theory that the proceeds were offset by the redemption obligation. In taking this position, the estate relied on the Eleventh Circuit's holding in Estate of Blount v. Comm'r, 428 F.3d 1338 (11th Cir. 2005), which concluded that insurance proceeds should be "deduct[ed] ... from the value" of a corporation when they are "offset by an obligation to pay those proceeds to the estate in a stock buyout." However, the IRS disagreed, as did a district court and eventually, the Eighth Circuit. The Supreme Court affirmed the Eighth Circuit and held that a contractual obligation to redeem shares is not necessarily a liability that reduces a corporation's value for estate tax purposes. In the Court's view, a fair-market-value redemption has no effect on any shareholder's economic interest, since no hypothetical buyer purchasing the deceased brother's shares at fair market value would have treated the company's redemption obligation as a factor that reduced the value of those shares.

In Loper Bright Enterprises, et al. v. Raimondo, 2024 PTC 237 (S. Ct. 2024), the Court overruled the 40-year precedent established in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc, 467 U.S. 837 (1984) regarding judicial deference to regulatory agencies' statutory interpretations. Under Chevron, courts reviewing agency rulemaking applied a highly deferential approach, asking (1) whether the statute at issue is ambiguous, and (2) if it is, whether the agency's interpretation of it is "permissible." The new rule set forth in Loper Bright requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because the statute is ambiguous. An example of a court's application of this new standard is the Tax Court's decision in Varian Medical Systems, Inc. and Subs v. Comm'r, 163 T.C. No. 4 (2024), where the court held that an IRS regulation under Code Sec. 78 that, in the court's view, effectively changed the effective date provided in the statute, was not entitled to deference.

Charitable Contribution Workaround to SALT Deduction Cap Rejected by District Court

Ever since Congress enacted the $10,000 limit on the deduction for state and local taxes in 2017 under Code Sec. 164(b)(6), high-tax states have developed various "workarounds" to allow state residents to reduce their federal tax liabilities. One such workaround, used by New York, New Jersey, and other municipalities, was the use of tax credit programs that allowed residents to make charitable contributions to their state or municipality and receive a tax credit in return. In 2019, the issued Reg. Sec. 1.170A-1(h)(3)(i), which provides that the amount of a taxpayer's charitable contribution deduction under Code Sec. 170(a) must be reduced by the amount of any state or local tax credit the taxpayer receives in consideration for the taxpayer's payment to the state or municipality. The reasoning of the regulation is that when a taxpayer receives a benefit in return for a donation, the taxpayer is allowed to deduct only the net value of the donation as a charitable contribution.

In State of New Jersey v. Mnuchin, 2024 PTC 120 (S.D. N.Y. 2024), states and municipalities that had enacted SALT cap workarounds involving credits for charitable donations sued the IRS seeking to invalidate Reg. Sec. 1.170A-1(h)(3)(i). The states and municipalities argued that the regulation was arbitrary and capricious and exceeded the IRS's authority, but the district court rejected those arguments and upheld the validity of the regulation. The court concluded that nothing in Code Sec. 170 suggested that Congress intended that charitable contributions made to state or local governments in exchange for tax credits would be exempt from the standard rule that the amount of a charitable contribution deduction is reduced by the amount of any benefit received.

Conservation Easement Regulation Invalidated by Tax Court on Procedural Grounds

In order for a taxpayer to a claim a charitable contribution deduction for the donation of a conservation easement on land, Code Sec. 170(h)(5)(A) requires that the conservation purpose of the contribution must be "protected in perpetuity." The statute does not define the term "protected in perpetuity." In Reg. Sec. 1.170A-14(g)(6), the IRS attempted to deal with the subject. Reg. Sec. 1.170A-14(g)(6)(ii) provides that, if a change in conditions makes the continued use of the property for conservation purposes impossible or impractical, the easement restriction must be extinguished by a judicial proceeding and the donee organization must receive as proceeds a fair market value that is at least equal to the proportionate value that the perpetual conservation restrict at the time of the gift bears to the value of the property as a whole at that time. This regulation is referred to as the "proceeds regulation."

In Valley Park Ranch, LLC v. Comm'r, 162 T.C. No. 6 (2024), a conservation easement donor's $14.8 million deduction was disallowed by the IRS on the grounds that the easement deed did not satisfy the proceeds regulation. The taxpayer took its case to the Tax Court, arguing that the IRS violated the Administrative Procedure Act (APA) when it issued the regulation by failing to adequately respond to significant comments that the regulation would thwart the purpose of the statute by deterring prospective donors. The Tax Court agreed with the taxpayer and held that Reg. Sec. 1.170A-14(g)(6)(ii) is invalid under the APA. In doing so, the court went against a decision it issued four years earlier in Oakbrook Land Holdings, LLC v. Comm'r, 154 T.C. 180 (2020), aff'd, 2022 PTC 70 (6th Cir. 2023), cert. denied (S. Ct. 2023), and stated that, to the extent its decision in Oakbrook holds otherwise, that decision will no longer be followed.

Eleventh Circuit: FBAR Penalties Violated Eighth Amendment's Excessive Fines Clause

In U.S. v. Schwarzbaum, 2024 PTC 309 (11th Cir. 2024), a taxpayer successfully challenged the imposition of penalties for willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR) on constitutional grounds.

The IRS imposed penalties under 31 U.S.C. Section 5321(a)(5)(C) on the taxpayer after determining that he willfully failed to report 17 Swiss bank accounts on an FBAR. Under the statute, the maximum penalty for willfully failing to file an FBAR is the greater of $100,000 or 50 percent of the account balance at the time of the violation. The IRS imposed an aggregate penalty of $12,555,813 on the taxpayer, including a $100,000 penalty for each of the three years at issue for one account - the maximum balance of which never exceeded $16,000.

After determining that FBAR penalties are punitive in nature and therefore subject to review under the Eighth Amendment's Excessive Fines Clause, the Eleventh Circuit concluded that the $100,000 penalties were grossly disproportionate to the offense of concealing the foreign account and therefore violated the Excessive Fines Clause. The court noted that 31 U.S.C. Section 5321 dictates only the maximum penalty to be imposed on each account, and nothing prevented the government from assessing a penalty proportionated to the nature and extent of the violation. The court noted that in U.S. v. Toth, 2022 PTC 121 (1st Cir. 2022), the First Circuit heard a similar case and concluded that FBAR penalties are not subject to the Eighth Amendment Excessive Fines Clause. In the court's view, the First Circuit failed to consider that even if the FBAR penalty has some remedial purpose, the test in the Excessive Fines context is whether the purpose of the penalty is solely compensatory. Having concluded that it is not, the Eleventh Circuit was unpersuaded by the First Circuit's decision and declined the follow it.

Tax Court Holds That Collection Due Process Rules Do Not Apply to FBAR Penalties

Another FBAR case worth noting was decided by the Tax Court in Jenner v. Comm'r, 163 T.C. No. 7 (2024). In this case, the IRS withheld funds from a married couple's monthly social security benefits to satisfy their unpaid penalties for failing to file FBARs for four years. The couple requested a collection due process (CDP) hearing under Code Sec. 6330 relating to the FBAR penalties, but the IRS determined that they did not qualify for a CDP hearing because the FBAR penalties assessed against them were not taxes and thus were not subject to the requirements of Code Sec. 6330.

The couple petitioned the Tax Court, arguing that they were denied their CDP rights and that the CDP procedures in Code Sec. 6330 apply to any type of liability to the extent the Treasury Secretary files a lien or intends to levy. Rejecting their arguments, the Tax Court held that FBAR penalties are not taxes imposed by the Internal Revenue Code, and thus are not subject to the CDP procedures. The court found that nothing in 31 U.S.C. Section 5321(a) which provides that an FBAR penalty is deemed a tax or that it is required to be assessed or collected in the same manner as a tax.

D.C. Circuit Reverses Tax Court's Decision That IRS Cannot Assess 6038(b) Penalties

Last year, the Tax Court held in Farhy v. Comm'r, 160 T.C. 399 (2023), that the IRS did not have the statutory authority to assess penalties under Code Sec. 6038(b) for failing report an interest in a foreign corporation on Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. That decision was seen by some practitioners as opening the door to other challenges to penalty assessments where the Code did not specifically grant assessment authority.

In Farhy 2024 PTC 141 (D.C. Cir. 2024), the D.C. Circuit reversed the Tax Court's decision in Farhy, holding that the text, structure, and function of Code Sec. 6038 demonstrate that Congress authorized assessment of penalties imposed under Code Sec. 6038(b). In Mukhi v. Comm'r, 163 T.C. No. 8 (2024), the Tax Court again considered whether Code Sec. 6038(b) penalties are assessable, this time in a case appealable to the Eighth Circuit. The Tax Court reaffirmed its conclusion that, despite the D.C. Circuit's reversal in Farhy, nothing in the text of Code Sec. 6038(b)(1) expressly authorizes the IRS to assess the Code Sec. 6038(b)(1) penalty. Relying on the principle of stare decisis and the need for uniformity in the tax law, the Tax Court said that it would continue to follow its decision in Farhy in cases outside of the D.C. Circuit.

Court Rejects Injunctive Relief for Tax Prep Business Stripped of Its EFINs

A district court case that caught practitioners' attention in 2024 was issued in Zirin Tax Company, Inc. v. U.S., 2024 PTC 204 (E.D. N.Y. 2024). In this case, a tax return preparation business sought a preliminary injunction in a district court after the IRS suspended its electronic filing identification numbers (EFINs) due to what the IRS believed were fraudulent deductions taken by customers of the business. The district court denied the business's request for a preliminary injunction. The court concluded that because the business had not demonstrated that it incurred non-compensable damages, it failed to satisfy its burden of showing the irreparable harm necessary for obtaining a preliminary injunction. Zirin Tax Company Inc. v. U.S., 2024 PTC 204 (E.D. N.Y. 2024).

IRS Provides Guidance on Matching Contributions for Student Loan Payments

A provision enacted by the SECURE 2.0 Act of 2022 allows employers to make matching contributions to employees' defined contribution plan, such as a Code Sec. 401(k) plan, on account of their qualified student loan payments (QSLPs), effective for contributions made for plan years beginning after December 31, 2023.

In Notice 2024-63, the IRS provided guidance to assist plan sponsors implementing QSLP match programs. The guidance addresses various issues relating to QSLP matches, including the definition of a QSLP, employee certification of QSLPs, and QSLP match reasonable procedures. For example, the Notice specifies that a QSLP must be made in repayment of a qualified education loan incurred by the employ to pay for qualified higher education expenses of the employee, the employee's spouse, or the employee's dependent. The employee who makes a payment on the qualified education loan must have a legal obligation to make the payment; thus, a cosigner would qualify for a QSLP match program, but a guarantor would not unless the primary borrower defaults on the loan. In addition, a plan with a QSLP match feature may not include provisions that exclude employees from receiving QSLP matches if those employees are eligible to receive elective deferral matches.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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