Small Business Taxes & Management

News On The Tax Front--The latest tax news.

Mutual Funds--Fees, Loads, and A, B, C Shares--Here's the lowdown on mutual fund fees and some thoughts on how to maximize your return.

IRS Grants Tax Relief for Hurricane Isabel Victims--The IRS provides special breaks for those in path of Hurricane Isabel.

In Brief:--Tax, business, and personal finance tips.

News On The Tax Front

Previously Reported In Daily Update

The IRS argues that, when you win a settlement (where the amount is taxable), the full amount is includable in your gross income, even if your attorney is due say, 1/3 of the award in a contingent fee case. You can, of course, deduct the amount due the attorney. But while the cash implications are the same as if you received the amount after the attorney deducted his fee, the tax ramifications are significantly different. In Sigitas Banaitis (2003-2 USTC 50,638; U.S. Court of Appeals, 9th Circuit) the Court held that the attorney's fees was not includable in income. The Court noted that under Oregon law an attorney's lien is superior to all other liens, except tax liens. The Court held that the attorney's fees should not have been included in the taxpayer's income. (Affirming in part and reversing in part T.C. Memo. 2002-5.

You can deduct up to $3,000 in losses on stock sales in any one year or you can use any amount of losses to offset gains. However, you've got to be able to prove your basis in the stock. In Stephen P. Arnold (T.C. Memo. 2003-259) the Court noted that taxpayers who fail to prove a basis in a sold asset are considered to have a zero basis in that asset. The taxpayers did not establish their basis and the Court disallowed the losses. In a second issue, the taxpayer tried to deduct losses from an S corporation. While losses are passed through to the shareholders, you can only deduct them if you have sufficient basis. The Court noted a taxpayer must establish that he has acquired basis in the stock and debt and, to the extent that he does, that his basis in those items was not reduced to zero because of losses claimed in prior years. Taxpayers who fail to prove that they have any basis in an S corporation are considered to have a zero basis in that corporation. The taxpayer argued that he established his basis with a bank statement showing that funds of $105,000 were wired into the corporation's bank account. While the taxpayer argued the deposits were from his personal account, there was no indication on the bank statement of the source of the funds. The Court found the taxpayer's basis in the S corporation to be zero. Note. It's important to keep records of all stock purchases and any adjustments to your basis (such as dividend reinvestments). For investments in S corporations, partnerships, and LLCs, you save all K-1s, documentation concerning equity investments (checks written to the entity and any ownership indication such as stock certificates) and debt investments (such as checks and notes evidencing the debt). For assets such as equipment, real estate, etc. keep purchase documents and asset additions or improvements, depreciation records, etc.

A bill has been introduced in the House that would increase the top two individual income tax rates and repeal the 15% and 5% rate on dividends as a means of supplementing revenue to pay for the military operations. The new 33% tax rate would go up to 36% and the 35% rate would go to 39.6%. The introduction of a bill is a long way from new law, and the representative who introduced it is Robert Wexler, a Democrat from Florida.

By contributing assets to a family limited partnership (FLP) you may be able to reduce the value of your assets for estate or gift tax purposes. In Clarissa W. Lappo (T.C. Memo. 2003-258) the taxpayer contributed marketable securities (mostly municipal bonds) and parcels of real estate subject to long-term leases to the partnership. The taxpayer retained a 1% general partnership interest (total interest of general partners was 1.2%. The limited partners had the remaining 98.8% interests. Both the taxpayer and the IRS brought their expert witnesses to court. The Court held that a minority interest discount of 15% and a marketability discount of 24% was appropriate.

In Matthew Luxton, et al. (2003-2 USTC 50,632; U.S. Court of Appeals, 8th Circuit) Beverly Luxton owed the IRS substantial amounts for unpaid employment taxes and penalties and interest. She assigned certain life insurance policies to the IRS such that the Service would receive the proceeds on her death. The beneficiaries (her children) named in the policies sought to stop the IRS from collecting the proceeds that were to be paid as a result of her death. The Court noted that the government's claim to the policy proceeds is based on its rights under the Collateral Assignments, not on its tax liens. The Court sided with the IRS, allowing it to collect all the proceeds from the policies. Under state (Minnesota) law the Collateral Assignments granted the IRS an interest in the policy proceeds superior to that of the named beneficiaries.

In Notice 2003-68 (IRB 2003-41) the Service announced that it will clarify and amend the definition of a qualified low-income community investment under Sec. 1.45D-1T(d)(1)(ii) of the temporary Regulations. 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). Section 1.45D-1T(d)(1)(ii) provides that the term qualified low-income community investment includes the purchase from another CDE of any loan made by such entity that is a qualified low-income community investment. Section 1.45D- 1T(d)(1)(ii) further provides that a loan purchased from another CDE is a qualified low-income community investment if it qualifies as a qualified low-income community investment either: (a) at the time the selling CDE made the loan; or (b) at the time the loan is purchased from the selling CDE. The IRS has made changes to the regulations in response to comments received on certain loans as qualified investments.

The statute of limitations (for federal income tax purposes) is three years. Basically, if you haven't heard from the IRS within 3 years from April 15, you can rest easy. But if you file late, the period of limitations begins on the day you file. In Walter R. Huff and Lacy C. Huff (T.C. Memo. 2003-256) the taxpayer claimed he filed his return on April 15. He also testified he included a From 4868 (Automatic Extension of Time to File) in the same envelope. Because the IRS lost the envelope bearing the postmark (the IRS saves the envelope on all late filed returns; states do the same), the taxpayers argued they must prevail because the IRS could not produce the envelope. The Court disagree, noting that the taxpayer must still produce evidence showing the return was timely mailed. The Court had trouble with some of the taxpayers' testimony, including the fact that he mailed both the extension request and the return in the same envelope. Moreover, the Court noted that the taxpayers filed their 1991, 1992, 1993, 1994, 1995, 1999, and 2000 late.

Sometimes it not clear as to whether a particular court has jurisdiction in a case brought before it. In Neal Swanson (121 TC--, No. 7) the taxpayer argued that the bankruptcy court is the only court that can determine whether the unpaid liabilities were discharged. In contrast to a deficiency proceeding, a lien proceeding commenced in the Court under Section 6330(d)(1), such as the instant lien proceeding, is closely related to and has everything to do with collection of a taxpayer's unpaid liability for a taxable year. A levy proceeding, like a lien proceeding, is commenced under Sec. 6330(d)(1). Thus, the Court held it did have jurisdiction. In addition, the Court found that the taxpayer did not file a valid return for the years at issue (a requirement for a tax debt to be discharged in bankruptcy). The Court noted that substitute for returns (SFRs) filed by the IRS for the taxpayer were not returns.

A bill introduced in the Senate (S. 1637) would replace the FSC Repeal and Extraterritorial Income Exclusion Act with one that would reduced the tax rate on income from manufacturing to 32% from 35%. The relief would apply to companies that manufacture in the U.S., regardless of size. The bill would also extend the foreign tax credit carryforward from 5 to 20 years.

In limited situations, taxpayers filing joint federal income tax returns may be relieved from joint and several liability. In Linda M. Weiler, a.k.a. Linda M. Krupnick (T.C. Memo. 2003-255) the Tax Court found the taxpayer's husband eligible for innocent spouse treatment with respect to his ex-wife's failure to report items of income from her sole proprietorship. On the other hand, his ex-wife was granted the same treatment with respect to the ex-husband's disallowance of certain itemized deductions. The Court noted the disallowed deductions were attributable to the husband's income.

You may be entitled to innocent spouse relief for tax liabilities on a joint return. In Fatemeh Entezam and Majid Zahedi (T.C. Memo. 2003-253) the Court found the taxpayer's wife, who sought relief, had actual knowledge of the tax understatement and that precludes innocent spouse relief. The Court noted the wife had a business degree and knew that large amounts of income were omitted from the 1989 through 1992 joint tax returns. Her contentions to the contrary were not credible. She and members of her family were involved in the operation of and record keeping relating to the business. In addition, she signed two mortgage loan applications reporting business income that significantly exceeded the business income reported on the joint tax returns. Moreover, she acknowledged that she willfully filed false joint tax returns relating to 1989 through 1992.

You can get a fresh start and have old debts wiped out in a bankruptcy proceeding, but only if you abide by certain rules. In In re Noor U. Hassan, Shamim Hassan, Debtors (2003-2 USTC 50,622; U.S. District Court, So. Dist. Fla.) the taxpayers attempted to have their federal income tax liabilities discharged in bankruptcy. The Court found that the taxpayers left significant tax liabilities unpaid while they enjoyed the fruits of their labor, vacationing, dining, and tending to family affairs. They had no adequate explanation or justification for their failure to pay taxes. In addition, they conducted their lives in a manner that prevented the attachment of assets by the IRS, even though they had significant income and otherwise enjoyed such income in their daily lives. The Court also noted that while the taxpayer earned substantial income as a physician, his employer did not withhold any taxes from his salary. The Court sided with the Bankruptcy Court in not allowing the taxpayers to have their tax debts discharged in bankruptcy.

The House has passed a bill that would liberalize the tax benefits of charitable contributions. It would, among other provisions, allow nonitemizers to deduct cash contributions, allow taxpayers age 70-1/2 and over to contribute tax-free IRA donations to charities and increase the charitable contribution allowed for scientific property used for research.

The Senate Finance Committee has adopted a proposal that would tax the proceeds received by a business of life insurance policies on former employees if the individual was not an employee at the time of his death. Policy proceeds that are used to buy back an equity interest owned by the insured would be excluded. The change would also exclude key man policies. The change would only affect policies entered into after September 17, 2003.

In a Chief Counsel Notice (CC-2003-031) the IRS has provided guidance with respect to when the IRS Office of Appeals will offer a taxpayer a face-to-face conference in a lien and levy case arising under Sec. 6320 or 6330. The law generally provides that a taxpayer will receive notice and opportunity for a hearing with Appeals upon the filing of a notice of federal tax lien pursuant to Section 6323. Section 6330 provides generally that a taxpayer will receive notice and opportunity for a hearing with Appeals prior to levy on that taxpayer's property or rights to property. These provisions do not define the nature of a CDP hearing. IRS regulations provide that the CDP hearing may, but is not required to, consist of a face-to-face conference with Appeals. The CDP hearing may also consist of written or oral communications between an Appeals employee and the taxpayer or the taxpayer's representative. Accordingly, in cases where the CDP hearing request raises only frivolous and groundless arguments, Appeals will contact the taxpayer to ask the taxpayer to state what relevant issues the taxpayer would like to address at the hearing. If the taxpayer fails to respond or responds with only additional frivolous and groundless arguments, the taxpayer will not be offered a face-to-face conference. The taxpayer will instead be provided a CDP hearing through telephone conferences, written correspondence, or some combination thereof. If the taxpayer responds with specificity that the issues to be discussed are valid collection alternatives or other nonfrivolous issues pertaining to the lien or levy, then a face-to-face conference will be offered to the taxpayer. If a face-to-face conference is offered and the taxpayer asks to record the conference, an audio recording of the face-to-face conference will be permitted in accordance Sec. 7521.

Under the new tax law dividends received for taxable years after December 31, 2002 are generally taxed at 15% or 5%, depending on the taxpayer's regular tax bracket. Certain requirements must be met to get the reduced rate. One is that the amounts received must not be "payments in lieu of dividends". If your broker lends your shares to another customer who has executed a short sale, the payments you receive are not dividends, but payments in lieu of dividends. Notice 2003-67 (IRB 2003-40) provides guidance to brokers and individuals regarding provisions in the Jobs and Growth Tax Relief Reconciliation Act of 2003 that affect information reporting for payments in lieu of dividends.

The IRS can levy a tax on earnings accumulated by a regular (C) corporation that are in excess of the business needs of the corporation. While the new law reduces the tax rate to 15%, it is still onerous since it is on income that has already been taxed. In Advanced Delivery and Chemical Systems Nevada, Inc. (T.C. Memo. 2003-250) the IRS argued that the taxpayer was a mere holding company and not entitled to accumulated earnings in excess of the exemption amount of $250,000. The taxpayer argued that it should not be treated as a holding company since the law provides that where a corporation substantially owns and effectively operates a subsidiary company, the business activities of the subsidiary may be attributed to the parent corporation. Corporate taxpayers, in appropriate circumstances, are allowed to take into account business activities of and to accumulate earnings for the needs of business entities they control, even though the taxpayer constitutes a separate legal entity. The taxpayer also argued that through general partnership principles the business needs of a partnership may be attributed to a corporate partner that controls the partnership. The Court generally sided with the taxpayer, that the operations of the controlled entities could be attributed to it. (However, the taxpayer was not able to show that all the accumulated earnings were for the reasonable needs of the business.)

If, in a court proceeding, a taxpayer introduces credible evidence with respect to a relevant factual issue, the IRS has the burden of proof with respect to that issue, provided the taxpayer meets certain requirements. In Daniel E. Spurlock (T.C. Memo. 2003-248) the Court sided with the IRS in finding the taxpayer had unreported income equal to the amount shown on the 1099-MISC produced by the IRS. The Court also found the taxpayer liable for a late filing penalty, failure to pay estimated tax penalty. In addition, the Court found the taxpayer uncooperative in preparing this case for trial. Noting he was disingenuous and evasive in his testimony, feigning memory lapses when questioned about his employment history. The positions advanced were groundless or frivolous. Although the taxpayer was warned repeatedly both before and during trial that his antics could result in the imposition of sanctions under section 6673, he has been undeterred. The Court found the taxpayer unreasonably protracted these proceedings and wasted the resources of respondent and this Court and required the taxpayer to pay a penalty of $5,000 for delaying tactics or frivolous arguments.

You can't simply take a loss on your tax return without documentation. In James Christian Jensen (T.C. Memo. 2003-249) the Court found that, while it was satisfied the taxpayer discontinued his radiology practice, he did not establish the amount of the loss or even the type of entity under which business operated. The Court disallowed the loss and concluded the taxpayer was liable for the accuracy-related penalty.

With many states in fiscal trouble, it's not surprising that the IRS and state tax officials announced the a new nationwide partnership to combat abusive tax avoidance (IR-2003-111). Under agreements with individual states, the IRS will share information on abusive tax avoidance transactions and those taxpayers who participate in them. Forty states and the District of Columbia have signed agreements with the IRS. The states and the IRS will then share information on any resulting tax adjustments, reducing the need for duplicating lengthy taxpayer examinations by both a state and the IRS. California, Louisiana, Maryland, Massachusetts, New Jersey, New York, Virginia and the District of Columbia joined with the IRS for the announcement. The additional 33 states in the partnership include: Alabama, Arizona, Arkansas, Connecticut, Georgia, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Minnesota, Mississippi, Missouri, Montana, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Washington, West Virginia and Wisconsin. More states are expected to join in the weeks ahead. The agreement leaves procedures governing communication on more routine taxpayer compliance efforts unchanged. In addition to greater cooperation in sharing leads in the area of abusive tax transactions, the partnership with the states includes outreach activities to the public to more effectively counter the claims of those marketing tax schemes and scams.

The IRS is reminding (IR-2003-109) approximately 750,000 small and mid-size businesses using off-the-shelf retirement plan documents that they must update their plans by Sept. 30, 2003, to maintain the tax benefits. Businesses that act after the deadline must pay a compliance fee to avoid loss of tax benefits. The deadline applies to small businesses that obtain certain IRS approved off-the-shelf plan documents from plan sponsors, such as banks, brokers, insurance companies, lawyers or consultants. The plans are the so-called Master & Prototype (M&P) plans and Volume Submitter plans. Even though such plans are approved and sponsors have updated them, businesses must still formally adopt the updated plans by Sept. 30. To do so, businesses should contact their plan sponsor. Employers who fail to amend their plans by Sept. 30, 2003, must apply for a determination letter to avoid plan disqualification, and, under the Revenue Procedure 2003-72, they will also have until Jan. 31, 2004, to apply. But they must pay a $250 compliance fee with their application.

In Announcement 2003-56 (IRB 2003-39) the Service provided guidance on some of the reporting requirements for passthrough entities with respect to dividends and capital gains for 2003. Partnerships and S corporations with fiscal years ending in 2003 completing the 2002 Forms 1065 and 1120S must report, for the portion of the tax year after May 5, 2003, the following additional information:

Post May 5, 2003 net short-term capital gain or loss;
Post May 5, 2003 net long-term capital gain or loss; and
Post May 5, 2003 net Section 1231 gain or loss.

The IRS reported (Notice 2003-65; IRB 2003-40) it is studying the circumstances under which items of income, gain, deduction, and loss that a loss corporation recognizes after an ownership change should be treated as recognized built-in gain (RBIG) and recognized built-in loss (RBIL) under Section 382(h). This notice provides guidance regarding the identification of built-in items and requests comments on this subject. Taxpayers may rely upon this guidance until the IRS issues temporary or final regulations under Sec. 382(h). The notice discusses two alternative approaches for the identification of built-in items for purposes of section 382(h): the 1374 approach and the 338 approach.

The IRS issued final regulations on the tax treatment of split-dollar life insurance arrangements (T.D. 9092). The regulations provide comprehensive tax rules for split-dollar life insurance arrangements that are entered into or materially modified after September 17, 2003. The regulations insure that split-dollar arrangements are appropriately taxed, curbing a backdoor form of executive compensation and promote greater transparency. A split-dollar life insurance arrangement involves two parties agreeing to split the premiums and/or benefits of a life insurance policy. These arrangements are often used for executive compensation or for gifts among family members. The final regulations provide that the tax treatment of split-dollar life insurance arrangements will be determined under one of two sets of rules, depending on who owns the policy. If the executive owns the policy, the employer's premium payments are treated as loans to the executive. Consequently, unless the executive is required to pay the employer market-rate interest on the loan, the executive will be taxed on the difference between market-rate interest and the actual interest. If the employer is the owner, the employer's premium payments are treated as providing taxable economic benefits to the executive. The economic benefits include the executive's interest in the policy cash value and current life insurance protection. The regulations provide similar loan and economic benefit rules for split-dollar life insurance arrangements between family members or other parties, such as corporations and their shareholders. Notice 2002-8, which was issued on January 3, 2002, included certain transition rules for split-dollar arrangements entered into prior to January 28, 2002. Those transition rules expire on December 31, 2003. The IRS also released today a revenue ruling stating that certain prior administrative guidance on split-dollar life insurance arrangements is now obsolete.

Mutual Funds--Fees, Loads, and A, B, C Shares

Mutual funds have come up with a number of ways of making money on their products. The discussion below isn't exhaustive but is representative of how you can be separated from your investment dollars.

Annual fees. These are not commissions to buy or sell a fund. Instead, it's a charge for managing the fund. It includes the cost of preparing the annual report, telephone operators answering questions, as well as stock analysts, fund managers, etc. Every fund will have an annual fee. The issue here is not the fee but how much. To determine how much you have to look at the expense ratio (annual fee divided by net assets of the fund). Some funds have an expense ratio of less than 0.2%. Index funds which require little management typically have the lowest expense ratios. But the expense ratio for the same type of index fund run by two different mutual fund companies can be significantly different. The expense ratio on a managed fund can be over 3%. That means the mutual fund company is charging 3% of the net assets per year to manage the fund. Is that excessive? It depends. If the fund charging 0.2% went up 10% when the market advanced 20% and the fund charging 3% rose 30%, paying the higher fee made sense. Unfortunately, studies have shown that the correlation between fees and performance is not good. If you're investing in an index fund, money market fund, etc., you should probably just look for the lowest fee structure. If you're putting your money in a managed fund, first look for one with the best performance, then look at the fee.

No-load funds. Load is just another name for commission. Some funds are true no-load funds. There is no charge to buy or sell shares of the fund. Vanguard Group and TIAA-CREF are the best known families of no-load funds. Some no-load funds have a low annual fee structure. However, some funds make up for being able to claim no-load status by charging high annual fees. In some cases the annual fees more than offset the commission savings.

12b-1 fee. Named for the SEC section that allows the fee, it's an annual charge assessed against the fund to cover promotion, marketing, etc. expenses. It's sometimes used to cover commissions paid to brokers who sell the fund. The fee is usually no more than 1%. The 12b-1 fee can be charged on no-load funds and on funds that have other commissions.

A shares. Mutual funds with loads have several different ways of charging the commission. Some funds use just one approach, some use several. The different approaches are known as A, B, and C shares. With A shares the load is all upfront. The load varies widely, but can be as high as 5.75%. The disadvantage is that the load reduces the funds that are earning money for you. For example, you have $10,000 to invest. If you purchase A shares with a 4% load, the amount of money working for you would be only $9,600. That's a definite drawback if you only intend to hold the fund for a short period of time. However, when compared to B and C shares (see below), paying the upfront load is generally preferred if you intend to hold for more than 5 or so years.

B shares. These shares usually have a 1% annual fee and a back-end load. That is, a commission is charged when you sell the shares. How much commission generally depends how long you've held the shares. Under a typical schedule you might pay 5% if you sell the shares within the first year, with the charge declining to 1% if you hold for 6 years. B shares generally aren't the most advantageous.

C shares. These shares carry a 1% annual fee. The are usually sold to individuals who are working with a broker. Since there's no front- or back-end load, C shares are the best choice for short-term holdings. However, since the annual fee never disappears, you're probably better off with A shares if you intend to hold for 6 years or more.

Advisor's fees. If you use an independent financial advisor and he's compensated on a per hour or percentage fee basis, rather than on a commission from the mutual fund, don't forget to take that into consideration when looking at the total fees. Hopefully, the advisor will steer you to well managed funds carrying a low fee structure.

Analysis. There's no question that fees can eat up a significant portion of your return. There are some points to consider. First, keep in mind that, as with management fees, the effect of a load depends heavily on the return. The effect of a 4% commission on a fund that's only returning 3% a year is much more than that on a fund that's showing returns of 12% annually. Unfortunately, while the market has recently rebounded sharply, most professionals believe the outlook for the next 5 years or more suggests much more muted returns than the heady days of the late 90's. That means paying attention to commissions is important. And commissions and annual fees for an index or money market fund

Second, you've got to compare returns. You can afford to pay more for a fund with a consistently good track record. And there's nothing wrong with paying management fees for an actively managed fund. On the other hand, paying hefty commissions and management fees for an index or money market fund doesn't make sense.

Third, if you're dealing with a broker, financial advisor, bank advisor, inquire carefully about fees. Brokers, etc. have been known to push funds with the highest commissions. While there may be a good reason for purchasing those funds, you should be a bit more skeptical.

Fourth, while some mutual fund companies have argued that there's a correlation between the fees and loads and the return on the fund, most studies have shown otherwise. Funds with high fees and loads frequently do no better (and sometimes worse) than those with more modest fees.

IRS Grants Tax Relief for Hurricane Isabel Victims

The IRS announced (IR-2003-112) special tax relief for residents in the Presidential Disaster Areas that were struck by Hurricane Isabel, beginning Sept. 18, 2003. This relief applies in the District of Columbia and parts of four states which the Federal Emergency Management Agency has declared eligible for individual assistance. The relief gives affected individual and business taxpayers additional time to file and pay certain taxes, and it provides affected employers extra time to make federal tax deposits.

Those states and counties covered by this announcement are:

In Delaware, the counties of:

Kent, New Castle and Sussex.

In Maryland the City of Baltimore and the counties of:

Allegany, Anne Arundel, Baltimore, Calvert, Caroline, Carroll, Cecil, Charles, Dorchester, Frederick, Garrett, Harford, Howard, Kent, Montgomery, Prince George's, Queen Anne's, Somerset, St. Mary's, Talbot, Washington, Wicomico and Worcester.

In North Carolina, the counties of:

Beaufort, Bertie, Brunswick, Camden, Carteret, Chowan, Craven, Currituck, Dare, Edgecombe, Gates, Halifax, Hertford, Hyde, Jones, Martin, New Hanover, Northampton, Onslow, Pamlico, Pasquotank, Pender, Perquimans, Pitt, Tyrrell and Washington.

In Virginia, the cities of:

Alexandria, Bedford, Buena Vista, Charlottesville, Chesapeake, Colonial Heights, Danville, Emporia, Falls Church, Fairfax, Franklin, Fredericksburg, Hampton, Harrisonburg, Hopewell, Lynchburg, Manassas, Manassas Park, Newport News, Norfolk, Petersburg, Poquoson, Portsmouth, Richmond, Staunton, Suffolk, Virginia Beach, Waynesboro, Williamsburg and Winchester;

The counties of:

Accomack, Albemarle, Amelia, Amherst, Appomattox, Arlington, Augusta, Bedford, Brunswick, Buckingham, Campbell, Caroline, Charles City, Charlotte, Chesterfield, Clarke, Culpeper, Cumberland, Dinwiddie, Essex, Fairfax, Fauquier, Fluvanna, Frederick, Gloucester, Goochland, Greene, Greensville, Halifax, Hanover, Henrico, Isle of Wight, James City, King George, King William, King and Queen, Lancaster, Louisa, Loudoun, Lunenburg, Madison, Mathews, Mecklenburg, Middlesex, Nelson, New Kent, Northampton, Northumberland, Nottoway, Orange, Page, Pittsylvania, Powhatan, Prince Edward, Prince George, Prince William, Rappahannock, Richmond, Rockbridge, Rockingham, Shenandoah, Southampton, Spotsylvania, Stafford, Surry, Sussex, Warren, Westmoreland and York.

The Extension Date for the items described below under Extensions to File or Pay Taxes is Nov. 18, 2003, except for Federal Tax Deposits for which the extension date is September 29.

The Designated Period for extensions is Sept. 18 through Nov. 18, 2003.

The Disaster Designation for this area is "Hurricane Isabel". Taxpayers should mark certain relief-related forms with this designation.

Affected Taxpayers

For the purposes of this tax relief, affected taxpayers include individuals and businesses located in the disaster area, those whose tax records are located in the disaster area, and relief workers. The same relief will also apply to any counties added to the Presidential disaster area.

Extensions to File or Pay Taxes

The IRS gives affected taxpayers until the Extension Date to file tax returns or make tax payments that have either an original or extended due date falling within the Designated Period. The IRS will abate interest and any late filing or late payment penalties that would apply during these dates to returns or payments subject to these extensions.

The IRS also gives affected taxpayers until the Extension Date to perform certain other time-sensitive actions described in Treasury Regulation Sec. 301.7508A-1(c)(1) and Rev. Proc. 2002-71, 2002-46 I.R.B. 850, that are due to be performed during the Designated Period. This relief includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2002-71.

This extension to file and pay does not apply to information returns (other than Form 5500 series), or employment and excise tax deposits; however, penalties on deposits due during this period may be abated based on reasonable cause, as long as the tax deposit is made by September 29, 2003.

To qualify for this relief, affected taxpayers should put the Disaster Designation (here, "Hurricane Isabel") assigned for their area in red ink at the top of the return, except for Form 5500, where filers should check Box D in Part 1 and attach a statement, following the form’s instructions. Individuals or businesses located in the disaster area, or taxpayers outside the area that were directly affected by these storms, should contact the IRS if they receive penalties for filing returns or paying taxes late.

Casualty Losses

Affected taxpayers in a Presidential Disaster Area have the option of claiming disaster-related casualty losses on either their 2002 or 2003 federal income tax returns. Claiming the loss on an original or amended 2002 return will get the taxpayer an earlier refund, but waiting to claim the loss on the 2003 return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements, but they must first subtract $100 for each casualty event and then subtract ten percent of their adjusted gross income from their total casualty losses for the year. For details on figuring a casualty loss deduction, see IRS Publication 547, Casualties, Disasters and Thefts.

Affected taxpayers claiming the disaster loss on a 2002 return should put the Disaster Designation assigned for their area in red ink at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers who need them to apply for benefits or to file amended returns claiming casualty losses. Such taxpayers should put the Disaster Designation assigned for their area in red ink at the top of Form 4506, Request for Copy or Transcript of Tax Form, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

In Brief:

Previously Reported In Daily Update

Think someone has stolen your identity? . . . The first thing to do is to close any accounts that you believe have been tampered with or opened fraudulently. You'll need a ID Theft Affidavit to dispute new unauthorized accounts. Go to www.ftc.gov/bcp/conline/pubs/credit/affidavit.pdf for a copy. Second, contact all any one of the 3 major credit bureaus and instruct the fraud departments to put a fraud alert on your credit file. Any creditors who check with the credit bureau then contact you before opening a new account in your name. This could be the most important step. Third, file a police report. While this may not undo any of your problems or prevent new ones, your creditors will want proof of the crime. And, if you take a casualty deduction on your return, a police report can be a crucial source of proof. Finally, file a complaint with the FTC. Again, this may not help you recover lost funds, but it will help law enforcement agencies prevent such crimes in the future. For more information, go to www.consumer.gov/idtheft

Gifts to spouse . . . Before transferring title to or gifting any property to your spouse, consider the estate tax consequences. While there's no gift tax or the transfer of property to your spouse and any property left to him or her in your will should qualify for the marital deduction and escape estate tax, the basis of the property will be significantly different if your spouse receives the property as a gift or through your will. If it's a gift, the general rule is your spouse takes over your basis. If he or she inherits the property, your spouse will get a basis stepped up to the value at the time of death. For example, you paid $1,500 for 1,000 shares of Madison Inc. stock in 1989. It's worth $475,000 today. If you gift your wife the stock, her basis will be $1,500 and, assuming the value doesn't evaporate, when she goes to sell it she'll have a big capital gain. On the other hand, if she inherits the stock when it's worth $475,000, she'll have no gain if she sells it the next day. There are other factors to consider, but you should think twice before gifting property with a potentially large gain.

Employees paid wages . . . If you pay employees an hourly wage and require them to do work at home, even if it involves only receiving and transmitting data related to their job, you may have to pay them for the time worked out of the office. For the rules in your state check with your state's labor department.

Direct mail help from the Post Office . . . The United States Postal Service has a direct mail guideline on the web. It's got plenty of good information, but it's aimed at nonveterans. Check it out at www.usps.com/directmail/dmguide/discoverdm/fulfillment.htm

Dividend tax break and preferred stocks. . . Preferred as well as common stock dividends qualify for the lower 15% and 5% tax rates. All things being equal, investing in preferred stocks for the dividend is a better bet. Preferred stocks, by definition are safer than common stocks in the same company, both as to principal and dividends. (Preferred stock holders will get paid before common stockholders. However, most companies that encounter financial problems generally don't have enough to fully pay off debt holders. Dividends on preferred stock have to be paid before common stockholders get anything.) But you've got to be careful. Not all preferred stock will qualify for the lower tax rate. Investment bankers have created a type of "preferred stock" that are really trusts that pay interest. There's no easy way to tell if the dividends qualify for the tax break. You've got to do some research.

Working late may not be worth it . . . Productivity decreases with long hours and even if you're fresh, working at night may not be smart. Some studies have shown that people work slower, make more mistakes and have more accidents on night shifts. Sometimes there's no alternative. But paying time-and-a-half or double-time may not make sense. Even for management, late nights can be counterproductive. Productivity declines notwithstanding, enough employees may begin to resent too many late nights, even if compensated, that you'll lose your best workers.

Buy or rent a home? . . . If you're committed to an area, buying generally makes more sense. But if you're only going to be in an area a short time or can't find what you really want, renting may be better. Here are some factors to consider:

Rental market in the area. It doesn't always run parallel to the buying/selling market. In some hot real estate markets, sales prices are out of sync with rental rates. In some areas there are so few renters that space is relatively cheap. The reverse is also true.
Is the market for homes overheated? There's no question that in some areas of the country, such as Boston and New York, the housing market is overheated. If you buy now you may find the value of your home may decline. It's happened in the past. A decline may not be fatal if you can hold on for 10 years. It could be a problem if you'll have to sell in a few years. Make no mistake about it. Much of the financial attraction of a home lies in the leverage and potential appreciation.
The numbers. Calculate your net savings from buying. That is the cost of saved rental payments less the costs of maintaining the house (repairs, taxes, interest, etc.) When subtracting taxes and interest, reduce the costs for the tax savings. If there are no savings, stop here. Otherwise, divide the savings by the price of the house to get an annual return. Add that to the potential increase in the price of the house. (Be realistic. This market won't go on forever.) If the total return is more than your borrowing rate, buying should be more attractive.
Transaction fees. There is no such thing as no closing costs. You'll need an attorney, appraisal, inspections, etc. The bank may pay some of these fees, but it'll cost you with a higher interest rate. And, you'll pay a commission when you sell. Thus, if you could incur costs equal to 7 or 8% of value. That could make a big dent in the total appreciation if you're only in the home a couple of years.

Keep it simple . . . Many people are using too many buzzwords and technical jargon. Sometimes it's clear what's meant or there's no other wording that will avoid confusion. But more often words or phrases are only clear to those in the business or, worse, there's no common definition. Trying to sell technical products or services to nontechnical managers by using buzzwords can be costly. It could result in lost sales or arguments when the product or service doesn't perform as the buyer anticipated.

Sales per square inch . . . Retailers in stores try to generate as much in sales per square foot as possible. Since rent is often a large part of a retailer's overhead, they don't want to pay for space that isn't generating sales. If you sell through a catalog, you should be computing sales per square inch. Divide the catalog sales of a product by the square inches used to advertise the product. Compare that to the sales per square inch for other products. Ideally, you'd like to discontinue the products that produce the lowest sales per square inch and replace them with new products. But you may have to temper your analysis by looking at other factors such as whether the product is necessary to induce customers to purchase other products. Better than sales per square foot or per square inch is profit per square foot or inch.

Considering home or building improvements? . . . There are at least two points to consider. First, some improvements pay off more than others when selling or renting property. For example, it'll cost very little to fix imperfections in walls and give a room a new coat of paint. And, because it's a high visibility item, you'll get a better return than if you enlarged a closet at the same, or maybe even more, cost. Redoing a kitchen can make sense because you'll normally get back a high percentage of what you put into it. But, since individual preferences vary, make sure you get a chance to enjoy it. Some improvements can actually diminish value. For example, adding a pool may be a liability in some cases. Much the same can be said for commercial properties. The second point to check is what the improvement will do to your real estate taxes. The rules, of course, vary from town to town. You'll have to check on the assessment for your town or city. Redoing a room without enlarging it or doing replacement work usually won't increase your taxes. Nor will landscaping such as trees, shrubs, etc. But adding an extension or converting a small bedroom into a bath probably will. Sometimes the rules are nothing short of foolish. For example, in one town we know, adding an above-ground deck requires a building permit and will add as much to your taxes as adding an interior room of the same size. On the other hand, putting in a stone patio requires no permit and won't increase your taxes.

CD is a generic term . . . When most individuals talk about CDs they mean the common variety you'll find at your local bank. But to financial professionals a certificate of deposit can encompass much more. And CDs are issued by foreign banks too. That means the safety can vary widely. If you're unsure, ask. Don't be embarrassed to ask your financial advisor or broker. It's your money.

Few acceptable reasons for late filing . . . You may be able to claim your accountant forgot to file an election on time and get an extension. But the same argument won't work for late filing your tax return. The return is your responsibility and you can't pass it off to your accountant or attorney. We've seen very few good excuses acceptable for late filing. One is being incapacitated. For example, you're in the hospital in intensive care as the result of an accident and you have no proxy for filing the return. (If you're married your wife could file; if it's a business return, another officer could file.) Or your home or office caught fire the day before the filing deadline. But don't simply claim you were ill or you lost your papers. Of course, if your taxes are fully paid, there's generally no penalty since it's based on what you owe with the return. But for some returns where no tax is due (such as nonprofits, pension forms, etc.) there's often a flat amount each day the return is late. Best advice? File on time.