The IRS Internal Revenue Service (IRS) announced this week that it has created a proposed new voluntary tip reporting program. The IRS calls the new program the Service Industry Tip Compliance Agreement (SITCA).
The tip reporting program is designed to work together with companies that have point-of-sale systems or electronic payment settlement methods. The IRS encourages employers who have these point-of-sale systems to use the new SITCA program to facilitate the reporting of tips.
The proposed program requires participating employers to submit an annual report that shows the tips for each employee. The participation in SITCA protects employers from liability that could exist if they do not report tips. It also is a flexible option that facilitates reporting employee tips.
SITCA would replace the Tip Rate Determination Agreement (TRDA), the Tip Reporting Alternative Commitment (TRAC) or the Employer designed TRAC (EmTRAC) program.
Employers that have existing agreements with the previous programs may continue to use them until (1) they voluntarily decide to participate in the SITCA program, (2) if the IRS determines that they are not in compliance with the prior program agreement or (3) until the first full calendar year after the final SITCA program revenue procedure is published.
The word "voluntary" has a special IRS meaning. If the employer decides to use the SITCA program for tip reporting, it will be required for the employees. Many restaurants, hotels and other commercial organizations now use a point-of-sale reporting system. This enables them to compensate their employees appropriately for tips that have been earned. It is a tradition to provide tips for good service, but the IRS emphasizes that these tips are included as part of taxable income.
Conservation Easement Penalty Rejected
In Seabrook Property LLC et al. v. Commissioner
; No. 5071-21 (Seabrook), the Tax Court determined there would be no Section 6662A penalties on a syndicated partnership conservation easement. The penalties were rejected due to the Tax Court's determination that Notice 2017-10 was invalid because it violated the Administrative Procedure Act (APA).
Seabrook is a partnership that was involved in gifts of conservation easements. The Internal Revenue Service (IRS) had denied a conservation easement deduction and engaged in litigation with Seabrook. Seabrook moved for partial summary judgment on the basis that the IRS assessment of a penalty under Section 6662A was invalid.
The IRS position on Notice 2017-10 involves several steps. The American Jobs Creation Act of 2004 (AJCA) enacted Section 6662A, Section 6501(c)(10) and Section 6404(g)(2)(E). Both of the latter provisions were retroactive and covered prior years. The IRS did not use the APA's notice-and-comment procedures on the retroactive sections. The IRS position is that because Congress enacted the two retroactive provisions and did not require compliance with the APA for those provisions, Section 6662A penalties may be levied and Notice 2017-10 did not require APA compliance.
However, the Tax Court rejected the IRS position in Green Valley Ranch Investors, LLC v. Commissioner of Internal Revenue
, 159 T.C. 5 (2022). The Green Valley
decision applied prospectively, and the Tax Court stated, "Our holding does not invalidate notices that had been issued before Congress enacted penalties. Those notices are not before us today and the circumstances surrounding their issuance are distinguishable."
Therefore, the Tax Court did not invalidate the prior notices, but determined the APA notice and comment requirements did apply to Notice 2017-10. Because that notice did not comply with the APA, the Seabrook motion for summary judgment was granted and the penalties were not applicable.
The Supreme Court has not yet accepted an appeal of the Tax Court's Green Valley
decision. Because this issue may create rules for other circumstances in which the APA may or may not be applicable, it is probable certiorari will eventually be granted and a decision will be issued. Until that is done, both the IRS and the Tax Court are likely to maintain their current positions.
Notice 2017-10 Violates Administrative Procedure Act (APA)
In Green Rock LLC v. IRS et al.
; No. 2:21-cv-01320 (Green Rock), the United States District Court for the Northern District of Alabama, Southern Division, held that Notice 2017-10 was issued without compliance with the Administrative Procedure Act (APA). Therefore, the notice is invalid.
Green Rock has been involved in syndicated conservation easement transactions. It is a land and real estate company in Birmingham, Alabama. In litigation with the IRS over reported charitable deductions for conservation easement gifts, Green Rock moved for summary judgment on the basis that Notice 2017-10 was invalid.
The APA requires that the applicable agency give notice of a proposed rule, provide interested persons with the opportunity to submit comments and then, after consideration of the comments, issue a final rule. The APA's notice-and-comment requirement is not applicable if a statute "expressly" supersedes or modifies the APA.
The "expressly" standard means that Congress has clearly indicated that there is an exception from APA. Section 6707A authorizes the issuance of Notice 2017-10 that creates listed transaction status for conservation easement syndicated partnerships that report charitable deductions. Section 6707A states a reportable transaction is defined by the Treasury Secretary.
The Green Rock case is appealable to the Eleventh Circuit, which has not previously addressed Notice 2017-10. However, the Sixth Circuit and Tax Court have both determined that Notice 2017-10 is subject to the APA and Congress did not expressly exempt this Notice from the APA requirements. See Green Valley Ranch Investors, LLC v. Commissioner of Internal Revenue
, 159 T.C. 5 (2022) and Mann Construction, Inc. v. United States
, 27 F.4th 1138, 1141 (6th Cir. 2022).
The IRS claims the action of Congress in passing the American Jobs Creation Act of 2004 (AJCA) indicated it was overriding the APA notice-and-comment requirement. However, the language of Section 6707A and Section 6011 does not specifically exempt these statutes from the APA.
The IRS also claims that this decision constitutes a nationwide injunction. This is a drastic form of relief that courts generally disfavor. However, this ruling is deemed by the District Court to vacate an agency action and not to be a nationwide injunction. Therefore, the Green Rock motion for summary judgment that Notice 2017-10 is invalid as a violation of the APA notice-and-comment requirement was granted.
Applicable Federal Rate of 4.6% for February -- Rev. Rul. 2023-3; 2023-6 IRB 1 (16 January 2023)
The IRS has announced the Applicable Federal Rate (AFR) for February of 2023. The AFR under Section 7520 for the month of February is 4.6%. The rates for January of 4.6% or December of 5.2% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.