News On The Tax Front--The latest tax news.
Electronic Federal Tax Payment System OnLine Gets Major Upgrade--If you use the EFTPS on-line, you'll see a major improvement.
In Brief:--Tax, business, and personal finance tips.
Previously Reported In Daily Update
If you're under a qualified domestic relations order (QDRO) in a divorce proceeding, the transfer of IRAs and qualified pension plan assets to a spouse isn't a taxable distribution and, thus, not subject to the premature distribution penalties. In Edward A. Bougas III (T.C. Memo. 2003-194) the divorce decree contained a provision that the taxpayers 401(k) and IRA accounts were to be his sole and exclusive property, free and clear of any claims by his spouse. No provision existed in the divorce judgment dictating that petitioner had to pay the ordered obligations from his IRA account. The divorce judgment did not provide for a specific source of funds from which petitioner was required to pay his divorce obligations. The Court found the taxpayer liable for the 10% premature distribution penalty.
Amounts received are generally taxable upon receipt. In John M. Merritt et ux. (T.C. Memo. 2003-187) the Tax Court found that the taxpayer had income from independent contractor fees of $129,000 in the year he received the funds, despite the fact that he later returned the funds. The Court noted that there was no evidence that there were any restrictions on the funds when he received them. In a second issue, the Court disallowed a deduction for litigation costs advanced to the clients based on a contingent fee. The Court noted that generally, litigation costs advanced or paid by lawyers on behalf of their clients based on contingent fee contracts under which the clients are obligated to repay the litigation costs to the lawyers if the client matters are resolved successfully are to be treated in the year paid as loans to their client, not as ordinary and necessary business expenses. The taxpayers argument that prior cases were distinguishable because they had not screened their clients on the probability of recovery were rejected by the Court.
The IRS has issued proposed regulations (REG-163974-02) removing provisions (1.817-5(f)(2)(ii) of the regulations that apply a look-through rule to assets of a nonregistered partnership for purposes of satisfying the diversification requirements of section 817(h) of the Code. The IRS believes that removal of these provisions will eliminate any possible confusion regarding the prohibition on ownership of interests by the public in a nonregistered partnership funding a variable annuity contract.
The IRS has issued contains temporary and proposed regulations (T.D. 9081 and REG-129709-03) concerning requirements for employee stock ownership plans (ESOPs) holding stock of Subchapter S corporations.
Which corporation gets to deduct the compensation income includible in an employee's gross income on the exercise or disposition of a nonstatutory option (under Sec. 83) when the employer corporation is acquired? Rev. Rul. 2003-98 (IRB 2003-34) addresses that issue.
The IRS has released its 2003-2004 Priority Guidance Plan, listing 268 projects the IRS plans to issue regulations, rulings, etc. on by June 2004. Detailed information on the issues submitted under the Industry Issue Resolution (IIR) program are included in Internal Revenue Service News Release IR-2003-92. Full copies of the 2003-2004 plan are on the IRS website under Tax Professionals, IRS Resources.
Before you go to Tax Court, be sure the Court can actually decide on your issue. In Danny and Roth Kosbar (T.C. Memo 2003-190) the taxpayer sought an abatement of interest on a tax deficiency. The Court held there was no abuse of discretion by the IRS. The Court understood the taxpayers' sole argument as to Service's refusal to abate interest, they are not liable for any of the disputed interest because, they state, they are not liable for the taxes and penalties upon which the interest accrues. The Court said it no jurisdiction in this case to decide that issue as framed by the taxpayers. Its jurisdiction over this case from Section 6404(h), and that section does not authorize the Court to decide whether taxes or penalties assessed by the IRS are proper.
The House Ways and Means Committee has released details of a bill (American Jobs Creation Act) that would cut business taxes. Key provisions include:
The bill would also repeal the Extraterritorial Income Exclusion Act of 2000 and make other changes to the foreign tax credit rules and corporate expatriation (inversion) rules.
Owning real estate personally and renting it to your business is usually a smart move. Doing the same with personal property such as equipment requires more analysis. In Paul and Pauline D. Kessler (T.C. Memo. 2003-185) the Court held that the taxpayers couldn't deduct passive activity losses from the rental of trucks and other equipment to their C corporation.
In a divorce proceeding you may have to give part of your IRAs, qualified plans, etc. to your spouse. If you simply cash in the IRAs, etc. the amounts will be taxable income and you may be subject to a premature distribution penalty. However, if you're under a qualified domestic relations order (QDRO), you'll escape those consequences. In Joseph W. Dorn (T.C. Memo. 2003-192) the Court noted that to establish that taxpayer was not taxable on the funds distributed, he must show, the funds distributed by the plan to his former spouse under the divorce decree, and that the divorce decree is a qualified domestic relations order that gave his former spouse the right to receive all or part of petitioner's benefits under the plan. The Court found the taxpayer did not present sufficient evidence to prove his QDRO claim.
In Alphonse Mourad (121 TC--, No. 1) the Tax Court held that an S corporation election was not terminated and no separate entity was created when the corporation filed for bankruptcy. Thus, the corporations only shareholder was taxable on the income passed through.
In Rev. Proc. 2003-61 (IRB 2003-32) the Service provided guidance for taxpayers seeking equitable relief from income taxes under Sec. 66c or 6015(f) for innocent spouse treatment. The revenue procedure sets forth the conditions under which the IRS will ordinarily grant equitable relief from an underpayment of income tax reported on a joint return. The procedure includes a nonexclusive list of factors for consideration in determining whether relief should be granted.
The IRS has announced (JS-596) the first child tax credit advance payment checks were put in the mail on July 25. Remember, these are being mailed in 3 batches. The next batch is scheduled to be mailed August 1; the last batch, August 8.
Section 45D(a)(1) provides a new markets tax credit on certain credit allowance dates described in Sec. 45D(a)(3) with respect to a qualified equity investment in a qualified community development entity (CDE). In order to encourage equity investments in CDEs, the IRS will amend Reg. Sec. 1.45D-1T(c)(3)(ii) to provide an additional exception permitting an equity investment made on or after the date the CDFI Fund publishes a Notice of Allocation of Availability (NOAA) in the Federal Register to be designated as a qualified equity investment. Accordingly, Sec. 1.45D-1T(c)(3)(ii) will be revised to provide that, notwithstanding Sec. 1.45D-1T(c)(3)(i), an equity investment in an entity is eligible to be designated as a qualified equity investment under Sec. 1.45D-1T(c)(1)(iii) if: Section 45D(a)(1) provides a new markets tax credit on certain credit allowance dates described in Sec. 45D(a)(3) with respect to a qualified equity investment in a qualified community development entity (CDE).
Want to find the status of your Advance Child Tax Credit? Go to Get your Advance Child Tax Credit Status at the IRS web site (www.irs.gov). You'll need your social security number, your filing status (married, single, etc.) and number of exemptions from your 2002 tax return. If you can't get in, you'll have to backtrack and go to http://www.irs.gov/individuals/article/0,,id=111546,00.html and check the requirements. Not all browsers will work and you'll have to enable session cookies and javascript. The website will have information about 11 days before the mailing date. The mailing date depends on the last two digits of the your social security number:
00-33 - July 25 mailingIf you did not claim the Child Tax Credit last year you are not eligible for an advance payment, even if you will be able to claim the credit on your 2003 returns. For example, if your only child is born this year, you will not get any advance payment, but you may qualify for the credit when you file your return next year. Some parents who claimed the Child Tax Credit last year will not receive an advance payment. A child may now be too old to qualify (over 16). Or the credit's tax liability and earned income limitations may result in no increase for that taxpayer. Or the amount may be too small. The government won't send a check when the calculated advance payment is less than $10.
34-66 - August 1 mailing
67-99 - August 8 mailing
The IRS has issued proposed amendments to the temporary regulations (REG-121122-03) under Section 1042. The proposed regulations would affect taxpayers making an election to defer the recognition of gain under section 1042 on the sale of stock to an employee stock ownership plan. The proposed regulations provide guidance on the notarization requirements of the temporary regulations.
The IRS has issued guidance (Rev. Rul. 2003-97; IRB 2003-34) regarding a financial product consisting of a forward contract and note (feline PRIDES) that is issued as a single unit. The guidance addresses the question of whether the interest on the note is deductible for tax purposes. The ruling clarifies that interest is deductible, but only under specified circumstances.
The IRS has issued two revenue rulings (Rev. Rul. 2003-92; IRB 2003-33 and Rev. Rul. 2003-91; IRB 2003-33) discussing the tax consequences of certain specialized annuity contracts. One deals with annuities that hold interests in partnerships, the second concerns variable life and annuity contracts that hold assets in sub-accounts.
The IRS has published temporary and final regulations relating to the reduction of tax attributes under Sections 108 and 1017 of the Code. These temporary regulations affect taxpayers that exclude discharge of indebtedness income from gross income under section 108.
The IRS has issued proposed regulations (REG-141669-02) relating to waiver under Section 6724 of a penalty imposed by Section 6721 for failure to file a correct information return. The proposed regulations provide guidance on the requirement of prompt correction of the failure to file or file correctly. The proposed regulations provide that the IRS will deem information returns promptly corrected if corrected within 30 days of the required filing date, or by August 1 following that required filing date. After August 1, a correction is prompt if made by the time announced by the IRS in published guidance. The proposed regulations do not change the rules for determining reasonable cause for waiving the penalty for failure to furnish correct payee statements under section 6722 or the time to comply with other information reporting requirements under section 6723.
The law provides that amounts received for the permanent loss or loss of use of a part or function of a body and are using the nature of the injury may be excludable from income under Sec. 105. However, in Stephen Hayden (T.C. Memo. 2003-184) the Court found the payments received from an insurance company were disability payments designed to replace lost income computed based on the taxpayer's former salary and weren't based on the nature of the injury. Thus, the payments were fully taxable.
In In re Roland Harry Macher (2003-2 USTC 50,537; U.S. Bankruptcy Court, West. Dist. Va., Roanoke Div.) the Court held that the IRS had to consider the taxpayer's offer in compromise considered according to normal procedures and policies applicable to taxpayers not currently bankruptcy debtors.
The IRS has published temporary regulations (REG-113112-03) relating to the reduction of tax attributes under Sections 108 and 1017 of the Code. The temporary regulations affect taxpayers that exclude discharge of indebtedness income from gross income under section 108. The text of those regulations also serves as the text of these proposed regulations.
The IRS has announced (Notice 2003-55; IRB 2003-34 and Rev. Rul. 2003-96; IRB 2003-34) that it will now consider lease-stripping arrangement as tax shelters, a listed transaction and subject to the disclosure requirements. Notice 95-53 is superseded. Lease strips are transactions in which one participant claims to realize rental or other income from property and another participant claims the deductions related to that income (for example, depreciation or rental expenses).
You can represent yourself in Tax Court, or you can have an attorney or another party who has passed a written exam given by the Tax Court. In Michael T. Hawkins and Janine M. Hansen (T.C. Memo. 2003-181) the taxpayers argued that their religious freedom was violated because the Court would not allow them to be represented in court by their religious advisor. The Court held the taxpayers could not use an advisor who was not allowed to practice before the Court. The Court also held that their religious beliefs were violated.
The IRS has issued proposed regulations (REG-138499-02) relating to the depreciation of property subject to section 168 of the Internal Revenue Code (MACRS property). Specifically, these proposed regulations provide guidance on how to depreciate MACRS property for which the use changes in the hands of the same taxpayer. The proposed regulations provide that personal use property converted to business or income-producing use is treated as being placed in service by the taxpayer on the date of the conversion. Thus, the property is depreciated by using the applicable depreciation method, recovery period, and convention prescribed under section 168 for the property beginning in the taxable year the change of use ("year of change") occurs. The depreciable basis of the property for the year of change is the lesser of its fair market value or adjusted depreciable basis at the time of the conversion.
The IRS has released draft copies of the individual income tax forms for 2003. The front page of Form 1040 is only slightly more complicated. There's now a line 9b for "qualified dividends" and a line 13b for post-May 5 capital gain distributions. Many of the other schedules are unchanged. The big change is on Schedule D, Capital Gains and Losses. There's an extra column for post-May 5th gains on the front of the schedule. On the back the computations of your taxable gain or loss and the tax using the maximum capital gain rates are much more complicated. That's partly a result of the new 15% (5%) rate for dividends, but also because 2003 is a transition year for capital gains. Sales made before May 6 will be taxed at the old rate. You can check out other changes at the IRS web site. Go to Tax Professionals, Draft Forms.
The IRS has issued a revenue ruling (Rev. Rul. 2003-72; IRB 2003-33) that applies a uniform method of determining when a child attains a specific age for purposes of Code Sections 21 (dependent care credit), 23 (adoption credit), 24 (child tax credit), 32 (earned income credit), 129 (dependent care assistance programs), 131 (foster care payments), 137 (adoption assistance programs), and 151 (dependency exemptions). Each of these provisions allows a credit, exclusion, or deduction to the taxpayer, provided, among other requirements, a child has not attained a specific age. For example, under Sec. 24(c), one of the requirements for a qualifying child for the child tax credit is that the child "has not attained the age of 17 as of the close of the calendar year in which the taxable year of the taxpayer begins." For purposes of each of the provisions identified in this revenue ruling, a child attains a given age on the anniversary of the date that the child was born. For example, a child born on January 1, 1987, attains the age of 17 on January 1, 2004.
The IRS has issued proposed regulations (REG-144908-02) that would provide an additional exception to the FUTA deposit requirements (in addition to the $100 threshold) for employers that are permitted to satisfy their obligation to deposit employment taxes by remitting the taxes with the employment tax return (de minimis depositors). Thus, an employer will not be required to deposit FUTA taxes for a quarter if the amount of the employer's accumulated FICA taxes and withheld income taxes for the quarter is less than $2,500 and those taxes are remitted with the employer's timely filed employment tax return for the quarter. The proposed regulations would apply to payments required after December 31, 2003.
The IRS has published final regulations (T.D. 9077) relating both to the amount treated as a transfer under section 2519 of the Internal Revenue Code when there is a right to recover gift tax under section 2207A(b) and to the related gift and estate tax consequences if the right to recover the gift tax is not exercised. The final regulations will affect donee spouses who make lifetime dispositions of all or part of a qualifying income interest in qualified terminable interest property.
In Rev. Rul. 2003-80 (IRB 2003-29) the IRS described the running of the limitations period for assessing a deficiency when a taxpayer files a bankruptcy petition. The timing of the issuance of a Notice of Deficiency and the filing of a bankruptcy petition determines whether and how the running of the period of limitations on assessment is affected by the bankruptcy. When the Notice of Deficiency is issued on or after the day on which the bankruptcy commences and before the termination of the automatic stay, or is issued less than 90 days before the bankruptcy commences (Situations A and B, respectively), the bankruptcy has an effect on the running of the period of limitations on assessment because of the application of section 362(a)(8) of the Bankruptcy Code and section 6213(a) and (f) of the Internal Revenue Code. When the Notice of Deficiency is issued 90 or more days before the bankruptcy commences (Situation C), the running of the period of limitations on assessment is not affected by the bankruptcy.
The IRS is reminding (Internal Revenue News Release IR-2003-89) employers and retirement plan professionals that they no longer have to file information about fringe benefit plans. The IRS suspended the requirement for an annual Form 5500 and Schedule F last year for such so-called pure fringe benefit plans. The IRS has since eliminated Schedule F altogether and also modified Form 5500 so fringe benefit plans could not be reported. However, based on past experience, the IRS is concerned that some employers may try to adapt prior year forms and schedules or add write-in information on a Form 5500 because they mistakenly think the filing requirement still exists. In fact, pure fringe benefit plans have no IRS filing requirement and therefore should file neither a Form 5500 nor a Schedule F.
The House Judiciary Committee has approved a bill that would make permanent the ban on state taxes on internet access charges. But sales tax on internet purchases is a different issue. Data suggest the states lost over $16 billion in sales taxes in 2001. That's too significant for them to ignore.
The IRS reported (Notice 2003-54; IRB 2003-33) it has become aware of a type of transaction, that is being used by taxpayers for the purpose of generating deductions. This notice alerts taxpayers and their representatives that the claimed tax benefits purportedly generated by these transactions are not allowable for federal income tax purposes. The transaction involves the use of a common trust fund (CTF) that invests in economically offsetting gain and loss positions in foreign currencies and allocates the gains to one or more tax indifferent parties and the losses to another taxpayer.
The IRS has issued proposed regulations (REG-108639-99) that would provide guidance for certain retirement plans containing cash or deferred arrangements under section 401(k) and providing for matching contributions or employee contributions under section 401(m) and contain nondiscrimination rules and other requirements. These regulations affect sponsors of plans that contain cash or deferred arrangements or provide for employee or matching contributions, and participants in these plans.
The IRS has issued final regulations (T.D. 9078) relating to a qualified subchapter S trust election for testamentary trusts under section 1361 of the Code.
The IRS has issued the following proposed, temporary and final regulations:
The Multistate Tax Commission (MTC) has reported that state corporate tax receipts may have been reduced by up to $12 billion in 2001 as a result of corporate tax shelters. With many states strapped for cash, look for them to follow the IRS lead and crack down on shelters and, very likely, increase compliance in other areas.
In Rev. Rul. 2003-90 (IRB 2003-33) the IRS has held that for taxable years beginning on or after January 1, 2000, a taxpayer that uses an accrual method of accounting incurs a liability for California franchise tax for federal income tax purposes in the taxable year following the taxable year in which the California franchise tax is incurred under the Cal. Rev. & Tax. Code, as amended. The ruling arises because of a 2000 amendment to the California franchise tax law. (Rev. Rul. 79-410 amplified.)
In Ray W. and Marilyn S. Sowards (T.C. Memo. 2003-180) the IRS used the bank deposits method to reconstruct the taxpayers income. The Court noted that bank deposits constitute prima facie evidence of income. The IRS must take into account any non-taxable source or deductible expense of which it has knowledge. The taxpayer countered that the amounts received from a client were actually loans and not income. The Court found the loan document and the taxpayer's testimony were not sufficient to show a true debt existed. It held the taxpayer had addition, unreported income. The Court also sided with the IRS in allowing the negligence penalty because of inadequate records, and the fraud penalty. The Court noted that the taxpayer's action indicated he willfully intended to conceal the income.
You may be able to recover your attorney's fees if you win a case against the IRS. However, it's not easy. In Charles B. Owens, Sally L. Owens (2003-1 USTC 50,518; U.S. Court of Appeals, 5th Circuit) the Court found the Service's reliance on a contested 1099-C (showing cancellation of indebtedness income) from the issuer reflecting nothing more than an intention to cancel the loan did not provide a reasonable basis in either fact or law. The Court found the Service's position unjustified and allowed the taxpayer to recover his legal fees.
Whether a true business exists for tax purposes depends on the facts and circumstances. The mere fact that you are doing business as a corporation, partnership, etc. doesn't mean you're entitled to losses. In Andantech L.L.C., et al. (2003-1 USTC 50,530; U.S. Court of Appeals, D.C. Circuit) the Court affirmed a Tax Court ruling that the entity must be disregarded because the partners did not intend to carry on a business. The losses on the tax returns were properly disallowed.
The IRS has published final regulations (T.D. 9075) that provide guidance on deferred compensation plans of state and local governments and tax-exempt entities. The regulations reflect the changes made to Section 457 by the Tax Reform Act of 1986, the Small Business Job Protection Act of 1996, the Taxpayer Relief Act of 1997, the Economic Growth and Tax Relief Reconciliation Act of 2001, the Job Creation and Worker Assistance Act of 2002, and other legislation. The regulations also make various technical changes and clarifications to the existing final regulations on many discrete issues.
In Damon C. Cicciari (T.C. Memo. 179) the Court held that an off-duty police officer that worked providing security services to businesses was self-employed. He was paid directly by the businesses and received a Form 1099-MISC. The taxpayer had argued he was a police department employee and not subject to the self-employment tax on the earnings (which he reported on the wages line of his tax return). While the taxpayer had to obtain permission from the police department to perform the work, the department did not control the employment in any way.
The IRS normally has three years from the filing of a tax return for assessment of tax deficiencies. In Filomena Pahamotang (T.C. Memo. 2003-177) the argued that the period had expired. The Court agreed with the IRS, noting that the Service had mailed notices of deficiency just before the expiration of the 3-year period. The law (Sec. 6503(a)(1)) provides that the mailing of the notice within the 3-year period suspends the running of the 3-year period for a minimum of 150 days.
In Announcement 2003-45 (IRB 2003-28) the Service advised payers that the backup withholding rate (under Sec. 3406(a)(1)) for amounts paid after December 31, 2002 has been reduced to 28% from 30%. The new rate reflects the reduced individual tax rates for years beginning after December 31, 2002. The IRS noted that the rate is incorrect on Forms W-9, the instructions for Forms W-9, W2G, and the 1099 series and in publications 17, 225, 505, 515, 525, 542, 550, 583, and 1212.
Notice 2003-52 (IRB 2003-32) clarifies the application of Section 911 of the Code to U.S. citizens and residents earning income in Iraq attributable to services performed by such individuals. In recent months, OFAC has issued several specific and general licenses that authorize individuals to engage in transactions related to travel to Iraq or to activities within Iraq. Such individuals are eligible for the exclusion under Section 911 provided that they meet the other requirements of that section.
Electronic Federal Tax Payment System OnLine Gets Major Upgrade
The IRS has announced (IR-2003-90) that the Internet version of the Electronic Federal Tax Payment System (EFTPS), the EFTPS-OnLine Web site, has undergone a major upgrade to include several new improvements to help taxpayers.
The changes will provide users with more than a half-dozen new features, ranging from more convenience for scheduling payments to expanded ability to track payment history. These are major changes for EFTPS-OnLine, which was introduced almost two years ago and allows taxpayers to make their federal tax payments electronically.
Taxpayers using the system will see many improvements for payments. You'll be able to:
Previously, you could schedule only one estimated tax payment at a time and then would log out before scheduling another. Payment history was available for only 120 days. And, the payment history search and sort feature was not available.
The upgraded site includes many other features that will make it much more user-friendly for those using the system. You can:
EFTPS is a service provided free by two agencies of the U.S. Department of the Treasury, the IRS and the Financial Management Service. The system enables taxpayers and tax professionals to make federal tax payments electronically using EFTPS-OnLine, EFTPS-Phone or EFTPS Batch Provider software for professionals.
Taxpayers can make payments 24 hours a day, 7 days a week from home or office; schedule payments up to 120 days in advance (for businesses) or 365 days in advance (for individuals); review the last 16 months of tax payment history online or by calling Customer Service.
In addition, taxpayers receive an EFT Acknowledgement Number for every EFTPS transaction for easy record keeping and as proof of the transaction. EFTPS is ideal for all business taxpayers and for individual taxpayers that make Form 1040 ES quarterly estimated payments.
Taxpayers can enroll in EFTPS by visiting the EFTPS-OnLine Web site at www.eftps.gov, or by calling EFTPS Customer Service at 1-800-555-4477 or 1-800-945-8400.
Previously Reported In Daily Update
State tax refunds may not be income . . . The tax benefit rule requires you to take into income amounts that you may be reimbursed or otherwise recover in one year that you deducted and got a tax benefit for in the past. While there are other examples, (such as medical expenses deducted in one year for which you are reimbursed in a subsequent year) the most frequently encountered example is state income taxes. It's rare you don't get a refund or have to pay additional amounts when you file your state return. If you get a refund, the state will send you a 1099-G. You must include the amount in income, but only up to the benefit received. Thus, if you took the standard deduction in 2002 and get a refund of $950 in 2003, none of the amount should be included on your 2003 return. You didn't get a tax benefit because you didn't deduct the taxes in the first place, so you shouldn't include the refund in income. Things can get more complicated if your income exceeds the phase-out threshold for itemized deductions. (You start to lose your deductions if your AGI exceeds $139,500.) Basically, you've got to recalculate your deductions for 2002. The amount includable in income is the difference between the amount of itemized deductions (after applying the deduction limitation) and the amount you would have been entitled to deduct had you taken the proper deduction and not received a refund. Your tax return program should do the calculations, but only if you take the time to enter the amounts.
Employers have responsibilities with respect to child support . . . The Federal Office of Child Support Enforcement's Employer Services web site has a wealth of information for employers about child support, calculation examples, state-by-state practices, publications, contact information, new hire reporting, income-withholding, medical support, remitting payments, links, etc. to help you meet your child support enforcement responsibilities. Federal Office of Child Support Enforcement's Employer Services www.acf.hhs.gov/programs/cse/newhire/employer/home.htm
Pulling out of a partnership or corporation? . . . If you've been a partner in a partnership or LLC or shareholder in a corporation and withdraw or have your shares redeemed, make sure you're still not liable for any loans. Chances are you may have personally guaranteed loans or even provided a personal guarantee to vendors. If you don't notify the lenders and get your name removed, you may find yourself still liable for the loan, but without any control over the actions of the business. That's the worst possible position to be in.
Who can receive tax information . . . The IRS is very careful in disclosing return information. In a recent IRS Legal Memorandum (ILM 200321017) the Service ruled that it can disclose returns or return information to designated nonattorneys, but only certain individuals (attorneys, CPAs, enrolled agents, etc.) can practice before the IRS. In order for such information to be disclosed, the taxpayer must sign Form 2848, Power of Attorney. Be sure to provide the taxpayer's taxpayer identity information, the identity of the person to whom the disclosure is to be made, the type of return (or specified portion of the return) or return information (and the particular data) that is to be disclosed, and the taxable year or years covered by the return or return information. Finally, the document (Form 2848) must be received by the Service within 60 days of the date of the taxpayer's signature.
Gifts between U.S. and foreign parties . . . While gifts to relatives living in foreign countries generally aren't reportable, that's not true for gifts from foreign parties. Amounts you receive from a foreign source must be reported on From 3520 if you receive more than $100,000 from a nonresident alien or foreign state. Amounts of more than $11,642 from a corporation or partnership or foreign persons related to such foreign corporation or partnership that are treated as gifts are also reportable. In addition, transfers to a foreign trust where you are the grantor must be reported. And, if you have more than $1,500 in interest or dividend income, you must answer the question in Part III of Schedule B (Form 1040). You have to check the Yes box if you have an interest in or signature or other authority over a financial account in a foreign country (e.g., a bank account) and the value in the account was $10,000 or more during the year. If that's the case, you'll have to file Form TD F 90-22.1. Check with your accountant or financial advisor for more details on this issue.
Mortgage rates going up . . . We're probably seen the bottom for mortgage rates. It's probably impossible to predict how high they will go. What should you do? First, don't panic. While you may have missed the bottom, there's no reason for desperate moves. If you're looking for a house, the increase in rates may dampen the rise in house prices. If you're only going to be in the house for a few years you might want to look at an adjustable rate mortgage. However, if you intend to be there more than about three years, you'll likely be better off with a higher rate on a fixed rate mortgage. The same is true if you're refinancing. Giving up a fixed rate mortgage for an adjustable one doesn't make sense if all you're looking for is a lower rate.
Employ illegal aliens? . . . An illegal alien is an individual who is not a resident of the U.S., is not a citizen or a lawful permanent resident and who does not have authorization to work from the Bureau of Citizenship and Immigration Services. Employing an illegal alien without verifying his or her work authorization status (complete Employment Eligibility Verification Form I-9) is guilty of a misdemeanor. But even if the worker is an illegal alien, you must still withhold income tax, social security, and Medicare taxes as you would for a U.S. citizen or lawful permanent resident. If the worker does not have a social security number and cannot get one, he can get an ITIN (Individual Taxpayer Identification Number).
Test the market first . . . Big companies can afford to do extensive test marketing before a product is formally introduced. The test must be large enough to be statistically valid, and must be done in a fashion that the outcome isn't affected. Most small companies can't afford the time or money for such a test. That doesn't mean you can't or shouldn't do some testing. Employees can be a cheap starting point. But their opinions are likely to be biased. They can be valuable in testing the product to insure it works, is safe, etc. The next step is existing customers. They may be more objective, but again, there can be bias. Random testing is much more expensive, but still can be done on the cheap. If you're selling nationwide, you've got to include samples from around the country. And don't forget to have a mix of rural and urban areas (assuming you sell to both) and other variables.
Partially worthless debts . . . You can deduct business bad debts that become partly uncollectible. Your tax deduction is limited to the amount you charge off on your books for the year. You do not have to charge off and deduct your partly worthless debts annually. You can delay the charge off until a later year. You cannot, however, deduct any part of a debt after the year it becomes totally worthless. For example, you discover that an account receivable is worthless in 2003. You must take the loss in 2003; you can't delay taking the deduction until 2004.
Deductible interest on refinanced mortgage . . . It's not unusual for taxpayers to refinance a home mortgage for a higher amount to take some cash out of the equity. Whether or not all the interest will be deductible will depend on the facts and circumstances. First, none of the interest will be deductible if the mortgage is not secured by the residence. While that's rarely an issue, it can be on certain loans. That's particularly true if the loan is from a relative. Second, the interest on any amount of the new loan in excess of the principal being refinanced can't exceed the lesser of the excess of fair market value of the house over the original principal amount or $100,000. (The $100,000 is sometimes called a "home equity" loan amount.) For example, when you purchased your home the mortgage was $200,000. You've paid it down to $180,000. That's now the "acquisition indebtedness" or the amount refinanced. Assume the fair market value of the house at the time of refinancing is $230,000. Your new mortgage is for $245,000. Interest on the amount in excess of the fair market value ($245,000 less $230,000 or $15,000) isn't deductible. More than likely you'll run into the second limitation. Assume the facts are the same as above, but the fair market value of the house is $400,000. You hit the fair market value limitation. Instead, only interest on the first $280,000 of principal ($180,000 original loan plus $100,000 "home equity" amount) would be deductible. Of course, any amount used to substantially improve the residence counts as acquisition indebtedness.
Taxability of disability insurance proceeds . . . The general rule is that if the employer pays the premiums for a disability policy, any benefits the employee collects on a disability claim is ordinary income to him or her. On the other hand, if the employee pays the premiums with after-tax funds, any benefits are not income. There are two corollaries. First, if the employer pays the premiums, but includes the amount on the employee's W-2 as additional income, the benefits received are not taxable. Second, if the employee pays part of the premiums (or part of the employer's payment is included on the employee's W-2) and the employer pays part, benefits will be part taxable and part nontaxable, in proportion to the amount paid by the employer and employee. In a recent letter ruling (LR 200312001) the taxpayer/employer asked the consequences of a plan where the employee could choose, at the beginning of each year, whether or not to have the premiums paid by his or her employer included in income for the year. The Service held that if the premiums are included in the individual's income for the plan year in which he or she becomes disabled, the benefits will be attributable solely to after-tax employee contributions and are excludable from the employee's gross income. If the employee has decided to have the employer pay the premiums, benefits will be includible in the employee's income. The importance of the ruling is that an employee can decide at the beginning of each year on the tax treatment of the premiums paid by the employer.
Waiver of 60-day IRA rollover for misappropriated funds . . . The IRS has relaxed some of the strict rules with respect to the 60-day rollover period. In a recent letter ruling (LR 200327064) the taxpayer's investment adviser misappropriated funds from his IRA. The taxpayer only discovered the misappropriation after the 60-day period expired. The IRS granted the taxpayer a waiver of the 60-day period, allowing the taxpayer to contribute the total amount stolen to one or more new IRAs.
Division of property owned as tenants-in-common . . . What happens if you and some relatives (or other parties) own property as tenants-in-common and some or all each want to take their own share and retitle it in their own names? When two or more people own property as tenants-in-common they each have a share (which need not be equal) in the property, but there's a single deed and no portion of the property belongs to any one individual. In a recent letter ruling (LR 200328035) a contiguous tract of real estate was owned as tenants-in-common by 3 individuals and a trust for the benefit of the child of another of the owners. Two of the owners, as joint tenants, owned an undivided fee interest in 3/6 of the property and a life estate for the life of their survivor in 1/6 of the property. The other person owned a 2/6 interest in the property and the trust owned a remainder interest in the 1/6 interest in which the two owned a life estate. The property will be partitioned into separate parcels that will not be owned jointly, but will be owned separately. The taxpayers represented that:
The IRS held that the partition of the property will result in no gain to the taxpayers. The key to the holding was that the property was contiguous. The Service cited two revenue rulings (Rev. Rul. 56-437 and Rev. Rul. 73-476), noting that in 56-437 the conversion of a joint tenancy in corporate stock into a tenancy in common for the purpose of eliminating a survivorship feature, was a nontaxable transaction. Similarly, the severance of a joint tenancy in stock, pursuant to an action under state law to compel partition, and the issuance of two separate stock certificates in the names of each joint tenant, is a nontaxable transaction. Rev. Rul. 56-437 concludes that in both cases there was no sale or exchange, and the taxpayers neither realized a taxable gain nor sustained a deductible loss. However, Rev. Rul. 73-476, holds that if three unrelated tenants-in-common of three separate parcels rearrange their interests so that each party becomes the sole owner of one of the parcels, an exchange occurs so that gain or loss is realized. Rev. Rul. 79-44 reaches the same conclusion on similar facts.
Copyright 2003 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536