Washington Hotline – June 1, 2021


167 Million Stimulus Payments

In IR–2021–119, the IRS announced that it has now made close to 167 million stimulus payments. Approximately $391 billion in payments have been distributed since March 12, 2021.

The latest Economic Impact Payments have been made under the American Rescue Plan. The IRS has been working with nonprofits and other organizations to make payments to individuals who did not receive checks during the first two stimulus efforts.

From May 12 through May 26, 1.8 million payments have been made totaling $3.5 billion. Of this group, there are 900,000 payments with a value of $1.9 billion made to individuals who did not receive a previous check or deposit.

The IRS also notes that many individuals have received a supplemental payment by filing their 2019 tax returns. However, many of these individuals could receive an additional amount if they file a 2020 tax return.

The IRS continues to process payments it calls “plus–up” amounts. These are additional payments based on the latest tax returns. Approximately seven million payments have been in this category.

The IRS will continue to gather information from individuals who do not normally file tax returns. Many of these individuals are also qualified to receive the 2020 Recovery Rebate Credit, the Child Tax Credit and the Earned Income Tax Credit.

A number of individuals who are experiencing homelessness and low-income individuals living in rural areas have been able to receive their Economic Impact Payments. Many of these individuals could receive additional amounts if they file a 2020 tax return. The IRS notes that free tax preparation services are available.

Some higher-income individuals will not receive the third round of Economic Impact Payments. Individuals making over $75,000 and married couples filing jointly with incomes over $150,000 receive reduced or no payments. The Get My Payment tool on IRS.gov may be helpful if individuals have questions about their Economic Impact Payments.

IRS Contests Split–Dollar Insurance Decision

In Machacek v. Commissioner, 906 F.3d 429 (6th Cir. 2018), rev’g T.C. Memo. 2016-55, the Sixth Circuit reversed a Tax Court decision. The Sixth Circuit determined that taxpayer John Machacek, Jr. should qualify for a $100,000 distribution from his Subchapter S corporation for a contribution to a split–dollar insurance arrangement.

Machacek received an employee benefit under the split-dollar plan. He and his wife were the only employees of the Subchapter S corporation. While the $100,000 contribution was qualified under the split-dollar provisions as a distribution, the IRS contended the payment should be treated as ordinary income to Machacek because he was an employee. The Tax Court agreed, ruling that the payment was ordinary income compensation. However, the Sixth Circuit interpreted Reg. 1.301–1(q)(1)(i) to indicate that a payment of the premium for even a sole shareholder would constitute a distribution of property. The Sixth Circuit ruled that the Regulation was applicable and “renders irrelevant whether John Machacek received the economic benefits through a compensatory or shareholder split–dollar arrangement.”

The IRS contends that it is contrary to the intent of the regulation to treat the economic benefits as a shareholder distribution rather than compensation. The Tax Court ruled in a similar case that a doctor who was both an employee and shareholder of a corporation received compensation. The opinion noted, “Under the Sixth Circuit’s approach in Machacek, economic benefits received by a shareholder would invariably constitute a distribution under Section 301, regardless of the relationship that accounts for the payment. We are unable to reconcile that approach either with the text of section 301(a) or the split–dollar regulations.”

Editor’s Note: This “compensation or distribution” issue arises regularly with Subchapter S corporations in which there is one shareholder or a couple as joint shareholders. The payments for insurance are claimed to be compensation by the IRS and Tax Courts, but distributions to a shareholder by the Sixth Circuit. Eventually, other circuits will be forced to rule on this question.

Senate Finance Committee Tie on Energy Plan

On May 26, 2021, the Senate advanced the Clean Energy for America Act (S. 1298) by a 14 to 14 vote. The bill is designed to enhance energy credits, particularly for clean energy that does not increase carbon emissions. It was introduced by Senate Finance Committee Chair Ron Wyden (D–OR). He stated, “Energy policy is tax policy, and the federal tax code is woefully inadequate to address today’s energy challenges. It is a hodgepodge of credits from yesteryear that do not effectively move us toward the goals of reducing carbon emissions, creating clean energy jobs or lowering electricity bills for American families.”

A bipartisan bill on energy credits had been previously introduced by Ranking Member Mike Crapo (R–ID) and Sen. Sheldon Whitehouse (D–RI). The Wyden bill is much more comprehensive. It includes $154 billion of incentives for clean electricity. A major provision is a new investment credit for power plants that produce zero carbon emissions.

Another controversial provision is an electric vehicle credit that could cost $21 billion during the next decade. There is a $7,500 credit for electric vehicles. There is an additional $2,500 credit if the vehicle is manufactured in the USA and another $2,500 credit if it is built in a union shop.

The bill has strong support by the Democratic party, but several Republican senators objected to the electric vehicle credit and other provisions.

Editor’s Note: All major automotive companies are transitioning to electric vehicles. There have been regular announcements of new electric cars and trucks this year. An estimated 20 to 40 new electric models have been announced or will be revealed in public media statements during the next 12 months. Even with the wholesale movement of automotive companies to electric vehicles, there will likely be a two- to three-decade transition from internal combustion engines to electric power. While the current bill is unlikely to pass in its existing form, Congress will be supporting the effort to move to electric vehicles.

Applicable Federal Rate of 1.2% for June — Rev. Rul. 2021-9; 2021-23 IRB 1 (16 May 2021)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2021. The AFR under Section 7520 for the month of June is 1.2%. The rates for May of 1.2% or April of 1.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.