By Herman Spence III

There have been several recent national articles about North Carolina tax matters.

1. The May 11, 2022 issue of Taxes – The Tax Magazine has an article entitled “100 Years of State and Local Taxation in North Carolina.” The article is by Roby B. Sawyers, who is a professor in the College of Management at North Carolina State University. In addition to providing interesting history, the article contains statistics, such as over the past thirty years, the percentage of state general fund tax revenues by source has (a) increased from about 48.5% to about 52% for individual income taxes, (b) increased from about 25% to 32.7% for sales and use taxes, and (c) decreased from about 8% to 2.7% for corporate income taxes.

2. On May 23, 2022, Tax Notes posted an interview with Charles Collins. Mr. Collins worked for the North Carolina Department of Revenue for more than thirty years before retiring from the Department at age 55. He has continued to be active in tax matters, including with ADP’s payroll operations.

3. On May 23, 2022, Tax Notes posted an article by Roxanne Bland about transactional nexus. It discusses Quad Graphics, Inc. v. NC Dept. of Rev., No. 407A21-1 (NC, filed Nov. 22, 2021). The article criticizes the formalistic distinctions between sales and use taxes that would prohibit the state from collecting a sales tax but permit it to collect a use tax.

Herman Spence III is an attorney with Robinson, Bradshaw & Hinson, P. A. in Charlotte.

After a 3-year hiatus, the Tax Section returns to beautiful Kiawah Island, SC for its annual meeting and CLE program, May 27-29, 2022. The 3-day program includes sessions on state and federal tax, tax policy, and planning, with added ethics and technology sessions. Speakers include well-known professionals from private practice, government, and education sectors. The program has been approved for 9 hours of CLE credit, including 1 hour each of ethics, substance abuse/mental health, and technology. There will also be plenty of time for attendees to enjoy golf, tennis, beaches, dinning, and other amenities that make Kiawah Island Resort special. Registration and program materials are at https://cle.ncbar.org/courses/41046 .

By Keith A. Wood

I. IRS Continues to Crack Down on S Corporation Disguised Wages.

In Ward & Ward Company v. Commissioner, T.C. Memo. 2021-32, the Tax Court held payments from an S corporation law firm to its owner/shareholder were wages subject to self-employment tax rather than a Subchapter S distributions of profit.

II. Court Rules Taxpayers Adequately Notified the IRS of Address Change: Direct Communication of Address Change to IRS Agent Was Sufficient Notice to IRS.

In Gregory v. Commissioner, No. 19-2229 (3d Cir. 2020), the Third Circuit held a couple’s filing of two IRS tax forms that used their new address along with direct communication of the address change to an IRS agent was sufficient notification to the IRS of the change of address. The Tax Court previously held the IRS sent a valid 90-day notice of deficiency to the couple’s last known address, and the couple had not provided the IRS with clear and concise notification of the address change.

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By John G. Hodnette

Section 731(c) generally treats marketable securities as money in determining gain or loss on a distribution to a partner. Section 731(a)(1) provides no gain is recognized on a distribution to a partner except to the extent any money distributed exceeds the adjusted basis of the partner in the partnership interest.

The term “marketable security” means financial instruments and foreign currencies that are, as of the date of the distribution, actively traded within the meaning of Section 1092(d)(1). For example, if a partnership distributes publicly traded stock with a value of $100 to a partner with an adjusted basis in her partnership interest of $50, the partner generally recognizes a gain of $50. However, there are a number of exceptions.

The first exception, in Section 731(c)(3)(A)(i), provides a marketable security is not treated as money if the partner receiving the security contributed the security to the partnership.

The second exception, in Section 731(c)(3)(A)(ii), provides a marketable security is not treated as money to the extent provided in regulations if the property was not a marketable security when acquired by the partnership. Reg. § 1.731-2(d)(iii) clarifies that is satisfied if (a) the entity that issued the security had no outstanding marketable securities when the security was acquired by the partnership; (b) the security was held by the partnership for at least six months before the security became marketable; and (c) the partnership distributed the security within five years of the security becoming marketable.

The third exception, in Section 731(c)(3)(A)(iii), provides a marketable security is not treated as money if the partnership is an investment partnership, and the partner is an eligible partner. A future blog post will describe what qualifies as an investment partnership and an eligible partner.

Finally, Section 731(c)(3)(B) provides for a reduction in the amount treated as money on a distribution of marketable securities equal to the difference between the partner’s distributive share of partnership net gain before the distribution and the partner’s distributive share of partnership net gain after the distribution. That is best demonstrated by Example 2 in Reg. § 1.731-2(j).

When gain is recognized as a result of Section 731(c), the basis of the marketable securities to which gain is recognized equals their basis as determined under Section 732 increased by the amount of such gain.  IRC § 731(c)(4)(A).

John G. Hodnette, JD, LLM is an attorney with Culp, Elliott, & Carpenter in Charlotte.

By John G. Hodnette

The most common penalties assessed by the IRS are the failure to file and failure to pay penalties under Section 6651. However, another common penalty is the failure to pre-pay penalty assessed pursuant to Section 6654 where a taxpayer who is required to make quarterly payments fails to make the payments. Section 6651 penalties can be abated by a showing of reasonable cause and not willful neglect. In contrast, Section 6654 has very specific rules about when a waiver can be granted.

Section 6654(e) provides narrow exceptions for the failure to pre-pay penalty. First, subsection (e)(1) provides an exception where the tax shown on the return is less than $1,000.  Second, subsection (e)(2) provides an exception for U.S. citizens and residents who did not have any tax liability in the prior year. Third, subsection (e)(3)(A) provides a waiver may be granted where there is a casualty, disaster, or some other unusual circumstances that would cause the imposition of the penalty to be against equity and good conscience. That standard is unclear.

The fourth exception, which is in subsection (e)(3)(B), is for reasonable cause and not willful neglect, but only if the taxpayer either (a) retired after having attained the age of 62 within the year for which the estimated payments were required to be made or the year prior to such year or (b) became disabled within the year for which the payments were required to be made or the year prior to such year. Qualifying for either (a) or (b) does not automatically waive the penalty, but it allows the taxpayer to argue reasonable cause exists for a waiver of the penalty.