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Top 10 Tax Developments of 2020

(Parker Tax Publishing January 2021)

The top tax developments of 2020 generally fell into two categories: (1) legislation, executive action, and IRS guidance providing tax relief for individuals and businesses affected by the ongoing COVID-19 pandemic.; and (2) the IRS's ongoing effort to finish implementing the changes brought on by the Tax Cuts and Jobs Act of 2017 (TCJA).

The most significant legislation enacted into law in 2020 was the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. An integral part of the CARES Act was the implementation of the Paycheck Protection Program (PPP). In addition, the Families First Coronavirus Response Act (Families First Act) addressed the COVID-19 crisis by requiring certain employers to provide paid sick and family-leave to employees impacted by COVID-19 and by providing employers and self-employed individuals with related tax credits. The year closed out with enactment of the Consolidated Appropriations Act, 2021, which extended and modified several CARES Act provisions, including the PPP, provided an additional $600 economic impact payment for individuals, and included extenders and other important tax provisions.

Finally, with respect to the TCJA, the IRS issued regulations and other guidance dealing with the additional first year deprecation deduction (bonus depreciation) under Code Sec. 168(k), the qualified business income (QBI) deduction under Code Sec. 199A, the deduction for meal and beverage expenses, the SALT deduction limitation, and like-kind exchanges.


1. President Signs CARES Act into Law

The biggest piece of legislation enacted to address COVID-19 was the Coronavirus Aid, Relief, and Economic Security (CARES) Act (Pub. L. 116-136), which was signed into law on March 27. For individuals, the CARES Act provided economic impact payments of $1,200 per individual and $500 per child, subject to phaseouts at adjusted gross incomes over $75,000 ($150,000 for joint filers and $112,500 for heads of household). The CARES Act also included a range of provisions pertaining to retirement benefits, including the ability to take coronavirus-related distributions without penalties with the option to recontribute such distributions ratably over three years and a waiver of the required minimum distribution rules for 2020. The CARES Act also gave individuals a $300 above-the-line deduction for certain charitable contributions made in 2020 along with other changes intended to encourage charitable giving. In addition, the CARES Act enacted an exclusion from income for taxpayers whose employers make payments on their student loans.

The CARES Act includes many provisions intended to aid businesses impacted by COVID-19. The PPP authorized the Small Business Administration to guarantee new loans to businesses affected by COVID-19 and such loans are forgivable if specified percentages of the proceeds are used for employee compensation, mortgage, rent, and utility payments. A payroll tax credit (i.e., the employee retention credit) gives eligible employers a credit against applicable employment taxes for each calendar quarter equal to 50 percent of the qualified wages with respect to each employee of the employer for the calendar quarter through December 31, 2020. The CARES Act also delayed the payment of employer payroll taxes between March 27, 2020, and January 1, 2021. Other provisions include a modification of the excess business loss limitation under Code Sec. 461(l) and an increase in the taxable income limitation for determining the business interest deduction limitation under Code Sec. 163(j). The CARES Act relaxed the rules for net operating losses (NOLs) under Code Sec. 172 by temporarily repealing the 80 percent taxable income limitation and providing a five-year carryback period for NOLs arising in tax years beginning in 2018, 2019, or 2020, with an option to waive the carryback period and instead carry forward these NOLs to future years.

The CARES Act also fixed the notorious "retail glitch" in the TCJA, effective as of the date of enactment of the TCJA (December 20, 2017). Due to a drafting error in TCJA, the 15-year recovery periods that were available for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property placed in service before 2018, no longer existed for such property placed in service after 2017. Instead, the depreciation period was 39 years. The CARES Act retroactively fixed this and such property now has a 15-year depreciation life and meets the bonus depreciation criteria specified in Code Sec. 168(k)(2)(A).

Additional Reading:

In-Depth: A Tax Practitioner's Guide to the CARES Act. Client Letter Included.
A Tax Practitioner's Guide to the Paycheck Protection Program (PPP). Client Letter Included.


2. Families First Coronavirus Response Act Provides Tax Credits for Required Paid Leave

On March 18, President Trump signed the Families First Coronavirus Response Act (Families First Act) (Pub. L. 116-127). Under the Families First Act, certain employers were required to provide paid sick and child-care leave to employees impacted by COVID-19. These paid leave requirements originally applied between April 1, 2020, and December 31, 2020, but were extended to March 31, 2021, by the Covid-Related Tax Relief Act (see below). The Families First Act also provided four new tax credits:

(1) a payroll tax credit for required paid sick leave;

(2) a credit for sick leave for certain self-employed individuals;

(3) a payroll credit for required paid family leave; and

(4) a credit for family leave for certain self-employed individuals.

Eligible employers who pay qualifying sick or child-care leave can retain an amount of the payroll taxes equal to the amount of qualifying sick and child-care leave paid, rather than deposit those taxes with the IRS. The payroll taxes that are available for retention include withheld federal income taxes, the employee share of social security and Medicare taxes, and the employer share of social security and Medicare taxes with respect to all employees. If there are insufficient payroll taxes to cover the cost of qualified sick and child care leave paid, employers can file a request for an accelerated payment from the IRS.

In July, the IRS issued final and proposed guidance (T.D. 9904 and REG-111879-20) dealing with the reconciliation of advance payments of the sick and family-leave tax credits under the Families First Act and the employee retention credit under the CARES Act and the recapturing of the benefit of these credits when necessary.

Additional Reading:

In-Depth: A Tax Practitioner's Guide to the CARES Act. Client Letter Included.
IRS Issues Guidance on Reporting Qualified Leave Wages Paid Under Families First Act.


3. IRS Postpones Tax Filing and Payment Deadlines

On March 13, President Trump issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the COVID-19 pandemic. The Emergency Declaration instructed the Secretary of the Treasury to provide taxpayers with relief from tax deadlines.

As a result, in Notice 2020-18, the IRS extended the due date for all returns and payments previously due on April 15, 2020, to July 15, 2020. Gift and generation-skipping transfer tax filing and payment deadlines were extended to July 15, 2020, in Notice 2020-20. Notice 2020-23 expanded on the deadline relief provided in Notices 2020-18 and 2020-20 by extending many other filing and payment deadlines, including payment and return filing deadlines for individuals, corporations, partnerships, and trusts and estates. Notice 2020-23 also extended the due date for quarterly estimated tax payments due on or after April 1, 2020, and before July 15, 2020, to July 15, 2020. Finally, Notice 2020-35 provided relief with respect to certain employment taxes, employee benefit plans, exempt organizations, individual retirement arrangements, and educational, health, and medical savings accounts, that were due to be performed on or after March 30, 2020, and before July 15, 2020.

Additional Reading:

Deadline for Income Tax Returns and Payments Postponed to July 15 due to COVID-19.
IRS Expands Filing and Payment Deadlines; Extends Time for Performing Certain Actions.
IRS Delays Deadlines Applicable to Employment Taxes, Employee Benefits, and Exempt Orgs.


4. Final Regulations Under Sec. 199A Address Previously Disallowed Losses, Trusts and Estates

In June, the IRS issued final regulations under Code Sec. 199A (T.D. 9899) to provide guidance on the treatment of previously suspended losses included in qualified business income (QBI). Under Reg. Sec. 1.199A-3(b)(1)(iv), previously disallowed losses or deductions allowed in the tax year generally are taken into account for purposes of computing QBI to the extent the disallowed loss or deduction is otherwise allowed by Code Sec. 199A. These previously disallowed losses include, but are not limited to losses disallowed under Code Secs. 461(l), 465, 469, 704(d), and 1366(d), except to the extent the losses or deductions were disallowed, suspended, limited, or carried over from tax years ending before January 1, 2018. These losses are used, for purposes of Code Sec. 199A, in order from the oldest to the most recent on a first-in, first-out (FIFO) basis.

Observation: The reference in the final regulations to Code Sec. 461(l), which was enacted by the CARES Act and generally disallows an excess business loss for taxpayers other than C corporations and treats the disallowed loss as a net operating loss carryover. The reference to Code Sec. 461(l) had not been included in the proposed regulations but was added to the final regulations after practitioners asked the IRS whether its absence meant that losses disallowed under Code Sec. 461(l) were not considered QBI in the year the losses were taken into account in determining taxable income.

The final regulations in T.D. 9899 also provid special rules for trusts and estates in computing the Code Sec. 199A deduction and in providing information to beneficiaries and owners. In Reg. Sec. 1.199A-6(d)(3)(iii), the IRS clarified that, in the case of a trust or estate described in Code Sec. 663(c) with substantially separate and independent shares for multiple beneficiaries, the trust or estate will be treated as a single trust or estate not only for purposes of determining whether the taxable income of the trust or estate exceeds the threshold amount but also in determining taxable income, net capital gain, net QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income for each trade or business of the trust or estate, and in computing the W-2 wage and UBIA of qualified property limitations.

Additional Reading:

Final 199A Regs Address Suspended Losses Included in Qualified Business Income.


5. President Trump Uses Executive Action to Provide Deferral of Payroll Taxes

In August, as Congress was unable to agree on a second round of pandemic assistance, President Trump signed four executive actions, one of which, the Memorandum on Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster (Payroll Tax Memorandum), directed the Secretary of the Treasury to use his authority under Code Sec. 7508A to make available the deferral of the withholding, deposit, and payment of employee social security taxes, subject to certain wage limitations.

In Notice 2020-65, the IRS implemented the deferral by postponing, at the request of an employee, the due date for the withholding and payment of the tax imposed by Code Sec. 3101(a), and so much of the tax imposed by Code Sec. 3201 as is attributable to the rate in effect under Code Sec. 3101(a), on wages paid between September 1, 2020, and December 31, 2020, until the period beginning on January 1, 2021, and ending on April 30, 2021. Notice 2020-65 provides that employers must withhold and pay the deferred taxes ratably from wages and compensation paid between January 1, 2021, and April 31, 2021, and interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid deferred taxes.

The President's attempt to provide tax relief by executive action generally fell flat with businesses. A coalition of organizations representing businesses, including the U.S. Chamber of Congress and over 30 industry trade groups, signed a letter addressed to Senate Majority Leader Mitch McConnell, Speaker of the House Nancy Pelosi, and Treasury Secretary Steven Mnuchin, expressing their concerns with President Trump's executive action. The letter stated that without Congressional action to forgive the payroll tax liability, the deferral would impose serious hardships on employees who would face a large tax bill in 2021, and that many members would continue to withhold and remit the payroll taxes required by law.

The Taxpayer Certainty and Disaster Relief Act of 2020, which was enacted as part of the Consolidated Appropriations Act, 2021 (passed on December 27), extended the time to repay deferred payroll taxes through 2021, but did not forgive the taxes.

Additional Reading:

President Trump Signs Memorandum on Deferring Payroll Tax Obligations.
Business Groups Indicate That Many Members Will Not Defer Payroll Tax Withholding.
IRS Notice on Payroll Tax Deferral Still Leaves Many Questions Unanswered.
President Signs $900 Billion Covid Relief Package; Paycheck Protection Program Expanded.


6. IRS Issues Bonus Depreciation Final Regulations and Other Guidance

In September, the IRS issued final bonus depreciation regulations (T.D. 9916) which generally affect taxpayers that depreciate qualified property acquired and placed in service after September 27, 2017.

The proposed bonus depreciation regulations issued in 2019 (REG-106808-19) contained a complex partnership look-through rule, which addressed the extent to which a partner is deemed to have a depreciable interest in property held by a partnership. The IRS withdrew the rule because the complexity of applying it would have placed a significant administrative burden on both taxpayers and the IRS. Thus, under the final regulations, a partner is not treated as having a depreciable interest in partnership property solely by virtue of being a partner in the partnership.

As noted above, the CARES Act corrected the "retail glitch" in the TCJA and amended the definition of qualified improvement property in Code Sec. 168(e)(6) by providing that the improvement must be "made by the taxpayer." In the preamble to the final bonus depreciation regulations, the IRS said that it was aware of questions regarding the meaning of "made by the taxpayer" with respect to third-party construction of the improvement and the acquisition of a building in a transaction described in Code Sec. 168(i)(7)(B) (pertaining to treatment of transferees in certain nonrecognition transactions) that includes an improvement previously made by, and placed in service by, the transferor or distributor of the building. The IRS clarified that an improvement is made by the taxpayer if the taxpayer makes, manufactures, constructs, or produces the improvement for itself or if the improvement is made, manufactured, constructed, or produced for the taxpayer by another person under a written contract. In contrast, if a taxpayer acquires nonresidential real property in a taxable transaction and such nonresidential real property includes an improvement previously placed in service by the seller of such nonresidential real property, the improvement is not made by the taxpayer.

Compliance Tip: In Rev. Proc. 2020-50, the IRS provided a procedure allowing taxpayer to file amended returns to apply either the 2019 proposed regulations (REG-106808-19) or the 2020 final regulations (T.D. 9916) for tax years ending on or after September 28, 2017, and before the taxpayer's first tax year that begins on or after January 1, 2021.


7. Final Regs Loosen Restrictions on Meal and Entertainment, Transportation and Commuting Expense Deductions

In two sets of final regulations, T.D. 9925 and T.D. 9939, the IRS provided guidance on the TCJA changes for the rules for deducting expenses under Code Sec. 274. Under Code Sec. 274(a)(1)(A), as amended by TCJA, no deduction is allowed for entertainment, amusement or recreation expenses. In addition, TCJA amended Code Sec. 274(a)(4) to disallow a deduction for the expense of any qualified transportation fringe (QTF) provided to an employee of the taxpayer. However, TCJA left in place the 50 percent deduction for certain business meals under Code Sec. 274(k) and Code Sec. 274(n). TCJA also did not amend Code Sec. 274(e), which provides exceptions to the limitations in Code Sec. 274(a) and allows a full deduction for some food or beverage of QTF expenses.

Observation: As noted above, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 temporarily repealed the 50 percent limitation on the deduction expenses for food or beverages provided by a restaurant and paid or incurred before January 1, 2023.

In T.D. 9925, the IRS finalized Reg. Sec. 1.274-11, which addresses the elimination by TCJA of the deduction for entertainment expenditures, and Reg. Sec. 1.274-12, which deals with the 50 percent limitation on food or beverage expenses and the exceptions under Code Sec. 274(e). In December, the IRS issued T.D. 9939 to provide final regulations under Reg. Sec. 1.274-13 and Reg. Sec. 1.274-14 regarding the TCJA disallowance of the deduction for QTF expenses.

One of the issues addressed by both sets of regulations was the exception under Code Sec. 274(e)(2) relating to employees and under Code Sec. 274(e)(9) relating to non-employees. Taxpayers had interpreted these exceptions as allowing a full deduction for an expense if it was included in the compensation and wages of the employee or gross income of the non-employee recipient, even if the amount of the expense exceeded the amount included in compensation or income. The proposed regulations provided that the exceptions in Code Sec. 274(e)(2) and Code Sec. 274(e)(9) would not apply to expenses for food or beverages if the value included in gross income was less than the amount required to be included under Reg. Sec. 1.61-21, or if the amount required to be included in gross income was zero. Likewise, Prop. Reg. Sec. 1.274-13(e)(2)(C) provided that the exception in Code Sec. 274(e)(2) would not apply to QTF expenses if the value included in the employee's gross income was less than the required amount under Reg. Sec. 1.61-21, or if the required amount was zero.

As a result of practitioners arguing that these proposed rules were unduly harsh given the difficulty in determining the value of food or beverages and fringe benefits under Reg. Sec. 1.61-21, the IRS modified the final rules to allow a taxpayer to apply Code Sec. 274(e)(2) even if the taxpayer includes less than the proper amount in compensation and wages as required under Reg. Sec. 1.61-21. In such a case, however, the amount of a taxpayer's deduction for food or beverage or QTF expenses is limited to the amount included in compensation and wages, taking into account the amount, if any, reimbursed to the taxpayer by the employee (i.e., the "dollar for dollar" methodology).

For QTF expenses, the final regulations in T.D. 9939 provide that if the value of a QTF exceeds the monthly per employee limitations on exclusion provided by Code Sec. 132(f)(2) ($270 per employee for 2020), so that only a portion of the value is included in the employees' wages, the taxpayer may apply Code Sec. 274(e)(2). However, in this case, the employer must use the dollar-for-dollar methodology in Reg. Sec. 1.274-13(e)(2)(i)(B).

In the preamble to T.D. 9925, the IRS said it continues to believe that, with regard to food or beverage expenses, if the amount to be included in compensation and wages or gross income is zero, whether zero is a proper or improper amount, the exceptions in Code Sec. 274(e)(2) and Code Sec. 274(e)(9) do not apply because no amount has been included in compensation and wages or gross income. For example, if the amount to be included is zero because the value of the food or beverages is excluded as a fringe benefit under Code Sec. 132, the exceptions in Code Sec. 274(e)(2) and Code Sec. 274(e)(9) do not apply. Similarly, these exceptions do not apply if the amount to be included is zero solely because the recipient has fully reimbursed the taxpayer for the food or beverages. In that case, however, the IRS stated that the exception in Code Sec. 274(e)(8) may apply if the food or beverages are sold to the recipient in a bona fide transaction for an adequate and full consideration in money or money's worth.


8. Consolidated Appropriations Act, 2021, Provides Additional COVID-19 Tax Relief

On December 27, President Trump signed the Consolidated Appropriations Act, 2021 (Pub. L. 116-260), to provide an additional $900 billion of COVID-19 relief to individuals and businesses. The tax provisions of the Appropriations Act included the Covid-Related Tax Relief Act of 2020 (Covid-Related Tax Relief Act), the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), and the Taxpayer Certainty and Disaster Relief Act, of 2020 (Disaster Relief Act).

The Covid-Related Tax Relief Act provides individual taxpayers with a second round of economic impact payments in the amount of $600 per taxpayer ($1,200 for married filing jointly), plus $600 per qualifying child. These payments are subject to the same phaseout thresholds that applied to the CARES Act economic impact payments ($75,000 of modified adjusted gross income, $112,500 for heads of household and $150,000 for married filing jointly). Congress made it slightly easier to qualify for the second payment by providing that, for married taxpayers filing jointly, if one spouse has a social security number (SSN) and the other does not, the spouse with an SSN qualifies for the $600 payment.

Under the Economic Aid Act, a second PPP loan for smaller and harder-hit businesses is available, with a maximum loan amount of $2 million. In addition, the Covid-Related Tax Relief Act provides that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. This provision (1) overrides prior IRS guidance issued in Notice 2020-32 and Rev. Rul. 2020-27, and (2) provides that the tax basis and other attributes of the borrower's assets will not be reduced as a result of the loan forgiveness.

The Disaster Relief Act extends and expands the employee retention credit enacted by the CARES Act. In addition, the Covid-Related Tax Relief Act extends the refundable payroll tax credits for paid sick and family leave provided under the Families First Act through the end of March 2021 and modified these credits so that they apply as if the corresponding employer mandates were extended through the end of March 2021. Under the Covid-Related Tax Relief Act, the repayment period for employer payroll taxes that were deferred under the Payroll Tax Memorandum was extended through December 31, 2021. The Covid-Related Tax Relief Act also provides an election for an individual who elects the credit for paid sick or family leave to use prior year net earnings from self-employment income, rather than current year earnings, in calculating the income tax credit available.

Effective for amounts paid or incurred after December 31, 2020, the Disaster Relief Tax Act amended Code Sec. 274(n)(2) to provide that the 50 percent limitation on the deduction for food or beverage expenses does not apply to expenses for food or beverages provided by a restaurant and paid or incurred before January 1, 2023.

For a full discussion of the Consolidated Appropriations Act, 2020, see the December 29, 2020, issue of Parker's Federal Tax Bulletin (PFTB 2020-12-29).


9. IRS Issues Additional Guidance on the Sec. 164(b)(6) SALT Deduction Limitation

The IRS continued to issue guidance in 2020 regarding the $10,000 limit on the deduction for state and local taxes (SALT) enacted by TCJA under Code Sec. 164(b)(6).

The final regulations issued in T.D. 9907 clarified that a taxpayer's payment to an entity described in Code Sec. 170(c) may constitute an allowable deduction as a trade or business expense under Code Sec. 162, rather than a charitable contribution, if the payment bears a direct relationship to the taxpayer's trade or business and is made with a reasonable expectation of financial return commensurate with the amount paid. The final regulations also provided safe harbors under Code Sec. 162 with respect to the treatment of payments made by business entities to an entity described in Code Sec. 170(c). Safe harbors are provided under Code Sec. 162 for payments made by a business entity that is a C corporation or specified passthrough entity to or for the use of an organization described in Code Sec. 170(c) if the C corporation or specified passthrough entity receives or expects to receive state or local tax credits in return. A C corporation or specified passthrough entity engaged in a trade or business may treat the portion of the payment that is equal to the amount of the credit as meeting the requirements of an ordinary and necessary business expense under Code Sec. 162. The final regulations also retain the safe harbor under Code Sec. 164 for payments made to an entity described in Code Sec. 170(c) by individuals who itemize deductions and receive or expect to receive a state or local tax credit in return. An individual who itemizes deductions and who makes a payment to a Code Sec. 170(c) entity in exchange for a state or local tax credit may treat as a payment of state or local tax for purposes of Code Sec. 164 the portion of such payment for which a charitable contribution deduction under Code Sec. 170 is disallowed under Reg. Sec. 1.170A-1(h)(3). Any payment treated as a state or local tax under Code Sec. 164, pursuant to the safe harbor provided in Reg. Sec. 1.164-3(j) is subject to the limitation on deductions in Code Sec. 164(b)(6).

In Notice 2020-75, the IRS announced its approval of certain SALT limit workarounds using passthrough entities and its intention to issue proposed regulations. Since Code Sec. 164(b)(6) applies to state and local taxes paid by individuals, but does not apply to taxes incurred in carrying on a trade or business or income producing activity, some states enacted entity-level taxes on passthroughs with corresponding owner-level credits. According to the IRS, the proposed regulations will clarify that state and local income taxes imposed on and paid by a partnership or an S corporation are allowed as deductions by the partnership or S corporation in computing non-separately stated taxable income or loss for the tax year of payment. Such payments are not an item of deduction that a partner or shareholder takes into account separately under Code Sec. 702 or Code Sec. 1366 in determining the partner's or shareholder's own federal tax liability; rather, the payments will be reflected in the partner's or shareholder's distributive or pro-rate share of non-separately stated income or loss reported on a Schedule K-1 (or similar form). Taxpayers are generally permitted to rely on the rules described in Notice 2020-75 for payments made after 2017.


10. Final Regulations on Like-Kind Exchanges Clarify Definition of Real Property

Another change enacted by TCJA was the narrowing of the like-kind exchange rules under Code Sec. 1031. Code Sec. 1031(a) provides that, after 2017, no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment if the real property is exchanged solely for real property of like kind which is to be held for productive use in a trade or business or for investment.

In 2019, the IRS issued proposed regulations under Code Sec. 1031 (REG-117589-18) which provided rules for determining whether property was real property for purposes of Code Sec. 1031. Under the proposed regulations, state or local law definitions generally (with certain exceptions) were not controlling for purposes of determining whether property is real property for Code Sec. 1031 purposes. The proposed regulations also included a "purpose or use" test for determining whether property is real property for Code Sec. 1031 purposes. The proposed regulations defined real property to include land and improvements to land, and improvements to land included both inherently permanent structures and the structural components of inherently permanent structures. But the proposed regulations also considered the function of property in determining whether property is real property for Code Sec. 1031 purposes (i.e., the purpose-or-use test). Under the proposed purpose-or-use test, neither tangible nor intangible property would be classified as real property if it contributed to the production of income unrelated to the use or occupancy of space, irrespective of any other factor under the proposed regulations.

Practitioners generally critiqued the scope of the application of state and local law in the proposed regulations for purposes of defining real property and also uniformly disagreed with the purpose or use test. They argued that it improperly narrowed the scope of the definition of real property for Code Sec. 1031 purposes and would treat certain types of property that have historically been treated as real property for Code Sec. 1031 purposes as personal property, contrary to Congress's intent. Particularly with regard to machinery or equipment, practitioners argued that if such property were inherently permanent, it should be treated as real property for purposes of Code Sec. 1031 regardless of its purpose or use or the type of income it generated.

In December, the IRS published final regulations in T.D. 9935. In response to practitioners' comments, the IRS reconsidered the degree to which state or local law determinations of real property should be controlling for defining real property for Code Sec. 1031 purposes. As a result, the final regulations provide generally that property is real property for purposes of Code Sec. 1031 if, on the date it is transferred in an exchange, the property is classified as real property under the law of the state or local jurisdiction in which the property is located. The final regulations also eliminated the purpose-or-use test for tangible property. Instead, under Reg. Sec. 1.1031(a)-3(a)(2)(ii)(A), if tangible property is permanently affixed to real property and will ordinarily remain affixed for an indefinite period of time, the property is generally an inherently permanent structure and thus real property for Code Sec. 1031 purposes, irrespective of the purpose or use of the property or whether it contributes to the production of income.

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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