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December 11, 2013
Just because you're on the accrual method doesn't mean you can always deduct an expense when you get the bill. In Vidal Suriel (141 T.C. No. 16) the taxpayer's wholly owned S corporation, Vibo was an accrual method taxpayer. Under the accrual method of accounting, taxpayers record liabilities as they are incurred. A taxpayer incurs a liability in the taxable year in which (1) all the events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect to the liability. Vibo claimed deductions for unpaid obligations, both principal and interest, owed into the Tobacco Master Settlement Agreement (MSA) fund, which is a qualified settlement fund under Sec. 468B. The IRS disallowed the deductions on the basis that economic performance did not occur until payment was actually made into the MSA fund, pursuant to Sec. 1.468B-3(c)(1), Income Tax Regs. Under Sec. 1366 the IRS made adjustments to the taxpayer's individual income tax returns and determined deficiencies in his income tax. The Court held that Vibo was not entitled to deductions for unpaid MSA obligations, because economic performance does not occur until the obligations are actually paid. The Court also held that because the special rules governing qualified settlement funds do not differentiate between interest and principal, we afford them equal treatment.
In Michael H. Dudek et ux. (T.C. Memo. 2013-272) the taxpayers entered into oil and gas lease agreements with EOG Resources, Inc. allowing the company to drill and extract oil and gas on their property. The agreement provided that the term may be extended for an additional five years for an extension payment of $2,500 per acre for a total of $883,250. The payment was not dependent on any extraction or production of oil or gas. The taxpayers received a 1099-MISC reporting the amount as miscellaneous income. The taxpayers reported the payment as a long-term capital gain on their return. To avoid ordinary income treatment for the bonus payment, the taxpayers argued that the Agreement was not a lease but was in substance a sale of their rights to any oil and gas on the property. The Court noted that where the owner of the land retains an economic interest in the deposits, the transaction is regarded as a lease and the proceeds are taxable as ordinary income. The Court held the royalty interest constitutes an economic interest because of the right to share in the proceeds of any oil and gas extracted. Thus, the transaction was regarded a lease. The Court held the $883,250 bonus payment was taxable as ordinary income, not capital gain.
Tip of the Day
Year-end equipment purchases . . . Last minute purchases can qualify for bonus depreciation or the Section 179 expense option. Two important points to keep in mind. To qualify for bonus depreciation the property was be new. That is, the first use of the property must begin with you. The rules are different for the Sec. 179 expense option. The equipment can be new or used. But the property must be acquired by purchase and it cannot be acquired from a related person or transferred between members of a controlled group.
December 10, 2013
The IRS has announced (Rev. Rul. 2013-25; IRB 2013-52) that interest rates will remain the same for the calendar quarter beginning Jan. 1, 2014. The rates will be:
Under the Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.
In Crescent Holdings LLC, Arthur W. Fields and Joleen H. Fields (141 T.C. No. 15) Holdings was a limited liability company formed on Sept. 7, 2006, and classified as a partnership for Federal income tax purposes. Resources was a limited liability company whose ownership was transferred to Holdings on Sept. 7, 2006. On Sept. 7, 2006, Resources entered into an employment agreement with Arthur Fields to have Holdings transfer a 2% interest in Holdings to Fields if he served as chief executive officer (CEO) of Resources for a period of three years ending on Sept. 7, 2009. The 2% interest was subject to a substantial risk of forfeiture and was not transferable. Holdings allocated partnership profits and losses attributable to the 2% interest to Fields for the taxable years 2006 and 2007 (years at issue). The Fields included these amounts in their gross income for the years at issue. Fields resigned as CEO and forfeited his right to the 2% interest before it vested. The issue was whether Fields or the other partners should recognize the undistributed partnership income allocations attributable to the 2% interest for the years at issue. The Court held the 2% interest is a partnership capital interest, not a partnership profits interest. Rev. Proc. 93-27, and Rev. Proc. 2001-43, are inapplicable because they apply only to partnership profits interests. The Court also held Sec. 83 applied to a nonvested partnership capital interest transferred in exchange for the performance of services and under Sec. 1.83-1(a)(1), the undistributed partnership income allocations attributable to the nonvested 2% partnership capital interest are to be recognized in the income of the transferor. Finally, the Court held Holdings was the transferor of the 2% partnership capital interest. The undistributed partnership allocations attributable to the 2% capital interest were allocable to the partners holding the remaining interest in Holdings.
Tip of the Day
Responsible for a tax-exempt veterans' organization? . . . In memorandum TEGE-04-1113-21 the IRS is revising examination guidelines for tax-exempt veterans' organizations described in Section 501(c)(19) of the Code by eliminating an agent's discretion to request DD Forms 214 at the outset of examinations for the purpose of determining whether the organization meets statutory membership requirements. Sections 501(c)(19) and 170(c)(3) provide statutory membership requirements for certain tax-exempt veterans' organizations. Compliance with these requirements has a direct effect on the qualification for tax-exempt status and the deductibility of contributions. In order to confirm whether a veterans' organization meets statutory membership requirements, IRM 184.108.40.206(1) provides that examining agents may request, among other documents, DD Forms 214, Certificate of Release or Discharge from Active Duty, of veterans' organizations. DD Form 214 is a military service discharge certificate issued to veterans, providing proof of military service. However, DD Form 214 also contains private information, such as medical information. Effective immediately, if an agent needs to determine the composition of membership of a veterans' organization, the agent shall initially request and collect from the organization four sets of documents--membership lists showing names and military service dates, a document showing the dues structure and classes of membership, information used to create the membership list, and documents related to the organization's policies and procedures on deciding on membership.
December 9, 2013
The IRS has issued (Notice 2013-80; IRB 2014-52) the standard mileage rates for business, charitable, medical or moving expense deduction purposes in 2014. The rate for business use will be 56 cents per mile (down from 56.5); for medical and moving purposes it will be 23.5 cents (down from 24). For charitable purposes the rate is 14 cents per mile, as provided by statute. The deemed depreciation per mile for taxpayers using the standard mileage rate will be 22 cents per mile (down from 23). For purposes of the allowance under a FAVR plan, the standard automobile cost may not exceed $28,200 and that for trucks and vans $30,400.
The Treasury Inspector General for Tax Administration (TIGTA) found that perpetrators of fraud are using stolen or falsely obtained EINs to submit tax returns with false income and withholding documents to the IRS for the sole purpose of receiving a fraudulent tax refund. The overall objective of this review was to assess the IRS's process for issuing EINs and its process to identify stolen or falsely obtained EINs used to report income and withholding. TIGTA identified 767,071 Tax Year 2011 electronically filed individual tax returns with refunds based on falsely reported income and withholding that used 277,624 stolen EINs used to report false income and withholding on 752,656 returns with potentially fraudulent refunds issued totaling more than $2.2 billion and 8,046 were falsely obtained EINs used to report false income and withholding on 14,415 tax returns with potentially fraudulent refunds totaling more than $50 million.
The IRS has issued proposed regulations (REG-126285-12) concerning the deductibility of start-up expenditures and organizational expenses for partnerships. The proposed regulations provide guidance regarding the deductibility of start-up expenditures and organizational expenses for partnerships following a technical termination of a partnership. The IRS is aware that some taxpayers are taking the position that a technical termination under Section 708(b)(1)(B) entitles a partnership to deduct unamortized start-up expenses and organizational expenses to the extent provided under Section 165. The IRS believes this result is contrary to the congressional intent underlying Sections 195, 708, and 709. Therefore, the proposed regulations amend Sec. 1.708-1 to provide that a new partnership formed due to a transaction, or series of transactions, described in Section 708(b)(1)(B) must continue amortizing the Section 195 and Section 709 expenses using the same amortization period adopted by the terminating partnership.
Tip of the Day
Doing business through multiple entities . . . It's not unusual for business owners to use several entities--partnerships, LLCs, S corporations and even regular corporations. It's also not unusual for the entities to have intercompany transactions. Madison Inc. performs management functions for Chatham LLC which rents property to Waterford Inc. You should be careful that the transactions are handled on an arms' length basis. And, if some of the entities have losses while others have profits, you should watch your basis carefully. You generally don't want to be in the position where one or more entities generates a loss that can't be used because you have insufficient basis. Other items to consider are intercompany loans, rental income, and intercompany transactions. Discuss the issues with your tax adviser.
December 6, 2013
The IRS has recently released publications updated for 2013 tax returns including:
In Gary L. Fish et ux (T.C. Memo. 2013-270) the issue was whether income received by the taxpayer husband's S corporation in a Section 351 transaction (contribution of property to a corporation in return for stock) with its subsidiary should be reclassified as ordinary income under Section 1239. Section 1239 treats gain from the sale of depreciable property between related taxpayers as ordinary income rather than as capital gain. Thus, the resolution of the issue depended upon whether the taxpayer husband's S corporation and its subsidiary were related persons for purposes of Section 1239. In this case the property in question was a Section 197 intangible. The Court noted that an amortizable Section 197 intangible is Section 1245 property. Thus, the gain from the sale or exchange of property between related taxpayers is subject to the antiabuse provisions of Sec. 1239 if the property is an amortizable Sec. 197 intangible. The Court also found that Sec. 1239 defines related persons as a person and all entities which are controlled entities with respect to such person. The Court noted a 50% ownership rule applied and looked at voting rights and valuation of both the common and preferred stock of the corporation. The Court held the gain received on the transaction was ordinary income.
Sending something to the IRS or Tax Court? It's considered filed on the day you mail it, but only if you use the U.S. Postal Service or a designated delivery service. In Robert J. Eichelburg (T.C. Memo. 2013-269) the taxpayer mailed his petition to the Tax Court using FedEx Express Saver. While the petition could have been mailed using FedEx, the only allowed services are Priority Overnight, Standard Overnight, 2 Day, International Priority and International First. Since the petition wasn't mailed using one of these services, it was considered received on the day it was actually received and, that was past the deadline. Check the rules before using other than USPS. See Notice 2004-83.
Tip of the Day
Partnership and S corporation charitable contributions of property . . . A partnership or S corporation that makes a contribution of noncash gifts of more than $500 must file Form 8283 with Form 1065, 1065-B or 1120S. If the total deduction for any item or group of similar items is more than $5,000, the partnership or S corporation must complete Section B of From 8283 even if the amount allocated to each partner or shareholder is $5,000 or less. The partnership or S corporation must give a copy of Form 8283 to each partner or shareholder receiving an allocation of the contribution. The partner or shareholder must attach a copy of Form 8283 to his or her tax return. If the contribution is $500 or less and the partnership or S corporation, combine the amount shown on the K-1 with your other noncash contributions to determine if you must file Form 8283.
December 5, 2013
House Ways and Means Committee Chair Dave Camp, R-Mich. has told reporters that no tax bill will be introduced this year. Camp said there just isn't any time left this year to mark up a tax reform bill. Camp also said the tax provisions expiring at the end of this year will not be extended at this time. (Selected provisions may be extended retroactively through an extenders bill next year or through tax reform legislation.)
The IRS is starting this year’s EITC due diligence compliance audits of return preparers. The audits highlight the need to file accurate claims for EITC and other refundable credits. The IRS visits include a review of EITC claims for compliance with Internal Revenue Code Section 6695(g). Requirements include:
Non-compliant return preparers face penalties of $500 per return and other consequences. Additionally, IRS auditors will conduct a review of the return preparer’s tax identification number or PTIN registration status and personal federal tax filing requirements. Visit EITC Central and review the preparer EITC due diligence training resources to learn more about preventing EITC errors.
The IRS has released Publication 17, Your Federal Income Tax for preparing 2013 tax returns.
In William B. Meyer (T.C. Memo. 2013-268) the IRS figured out how much the taxpayer owed and wanted to collect by levying on his property. The taxpayer got a collection due process (CDP) hearing, but the Appeals officer upheld the decision to levy. The taxpayer argued that the Appeals officer abused his discretion by not properly verifying that the IRS followed applicable law or administrative procedure. The taxpayer claimed the IRS either never created a notice of deficiency or never mailed it. The Tax Court remanded the issue to the Appeals Office to clarify the record as to whether a notice of deficiency was both properly issued and mailed to the taxpayer in light of intervening caselaw.
Tip of the Day
Record ownership . . . Selling your business? Liquidating? If you're audited down the road you may need access to those records. It's common to provide records to the new owner, but make sure you either keep a copy or include language in the contract allowing you access to them for the appropriate period of time. There's no reason you shouldn't be able to retain a copy of any electronic data, e.g., your accounting files. Talk to your accountant and attorney.
December 4, 2013
In a unanimous decision, the U.S. Supreme Court has held that a District Court had jurisdiction to determine whether the partnerships' lack of economic substance could justify imposing a valuation-misstatement penalty on the partners. The Court noted under TEFRA's framework, a court in a partnership-level proceeding has jurisdiction to determine "the applicability of any penalty . . . which relates to an adjustment to a partnership item." A determination that a partnership lacks economic substance is such an adjustment. TEFRA authorizes courts in partnership-level proceedings to provisionally determine the applicability of any penalty that could result from an adjustment to a partnership item, even though imposing the penalty requires a subsequent, partner-level proceeding. The Court held the plain language of the valuation misstatement penalty was applicable in this case. Once the partnerships were deemed not to exist for tax purposes, no partner could legitimately claim a basis in his partnership interest greater than zero. United States v. Woods, U.S. Supreme Court.
The Affordable Care Act (ACA) law seeks to provide more Americans with access to affordable health care. The Premium Tax Credit (PTC) Project falls under the IRS ACA Program. Beginning January 2014, eligible taxpayers who purchase health insurance through an Exchange may qualify for and request a refundable tax credit (the PTC) to assist with paying their health insurance premium. The credit is claimed on the taxpayer’s Federal tax return at the end of each coverage year. Because it is a refundable credit, taxpayers who have little or no income tax liability can still benefit. The PTC can also be paid in advance to a taxpayer’s health insurance provider to help cover the cost of premiums. This credit is referred to as the Advanced Premium Tax Credit (APTC). The Treasury Inspector General for Tax Administration performed an audit to determine if the IRS is adequately managing systems development risks for the PTC Project. TIGTA evaluated the IRS’s key management controls and processes for risk management, requirements and change management, testing, security, and fraud detection for the PTC Project, which is being developed in the IRS’s new Enterprise Life Cycle Iterative Path. TIGTA found that the IRS has completed development and testing for the PTC Computation Engine (PTC-CE) needed to calculate the APTC and the Remainder Benchmark Household Contribution. In addition, the IRS developed a process to verify the accuracy of the PTC-CE calculations. However, improvements are needed to ensure the long-term success of the PTC Project by adherence to systems development controls for: (1) configuration and change management; (2) interagency test management process; (3) security; and (4) fraud detection and mitigation, in accordance with applicable guidance.
Tip of the Day
One client independent contractor? . . . Can you be an independent contractor if you have only one client or customer? Yes, but it may be a flag if you're audited and the IRS inquires of your customer base. And that factor will go against you. However, if the other factors are in your favor, you shouldn't have a problem.
December 3, 2013
The Treasury announced that the U.S. has signed intergovernmental agreements (IGAs) with the Cayman Islands and Costa Rica to implement the Foreign Account Tax Compliance Act (FATCA). FATCA is rapidly becoming the global model for combating offshore tax evasion and promoting transparency. FATCA, enacted in 2010, seeks to obtain information on accounts held by U.S. taxpayers in other countries. It requires U.S. financial institutions to withhold a portion of payments made to foreign financial institutions (FFIs) that do not agree to identify and report information on U.S. account holders. FFIs have the option of entering into agreements directly with the IRS, or through one of two alternative Model IGAs signed by their home country. Signed on November 29, the Cayman Islands IGA is a Model 1B agreement, meaning that FFIs in the Cayman Islands will be required to report tax information about U.S. account holders directly to the Cayman Islands Tax Information Authority, which is the sole channel in the Cayman Islands for the provision of tax-related information to other governments. The Cayman Islands Tax Information Authority will in turn relay that information to the IRS. Additionally, the United States and the Cayman Islands also signed a new Tax Information Exchange Agreement (TIEA). The Costa Rica IGA was signed on November 26 and is a Model 1A agreement, meaning that the U.S. will also provide tax information to the Costa Rican government regarding Costa Rican individuals with accounts in the U.S.
Tip of the Day
Dues may not be fully deductible . . . Dues to a professional organization are generally deductible on your business tax return or as a miscellaneous itemized deduction on your personal return. But many organizations engage in lobbying and the portion of your dues expended for such purposes are not deductible. The nondeductible amount can vary from very minor to a significant dollar amount depending on the organization. It should be spelled out on your dues statement.
December 2, 2013
The IRS has issued final regulations (T.D. 9647) that provide user fees charged for processing installment agreements and offers in compromise. The final regulations affect taxpayers who wish to pay their federal tax liabilities through installment agreements and offers in compromise. Effective December 2, 2013, the fee for entering into an installment agreement increases from $105 to $120; for restructuring or reinstating an agreement from $45 to $50; the fee for a direct debit installment agreement remains at $52; the fee for any installment agreement for low-income taxpayers remains at $43. The fee for processing an offer in compromise increases from $150 to $186.
Section 3402(p) allows for voluntary income tax withholding agreements. Section 3402(p)(3) authorizes the IRS to provide regulations for withholding from (A) remuneration for services performed by an employee for the employee's employer which does not constitute wages, and (B) from any other payment with respect to which the IRS finds that withholding would be appropriate, if the employer and employee, or other parties, agree to such withholding. Section 3402(p)(3) also authorizes the IRS to prescribe in regulations the form and manner of such agreement. Section 31.3402(p)-1 of the Employment Tax Regulations describes how an employer and an employee may enter into an income tax withholding agreement under Section 3402(p) for amounts that are excepted from the definition of wages in Section 3401(a). The IRS has issued temporary (T.D. 9646) and proposed (REG-146620-13) regulations relating to voluntary withholding agreements. The regulations allow the Secretary to issue guidance in the Internal Revenue Bulletin to describe payments for which the Secretary finds that income tax withholding under a voluntary withholding agreement would be appropriate. In the explanation of the provisions the IRS said expanding the use of voluntary withholding agreements to payments designated by the Secretary as eligible for voluntary withholding will permit taxpayers to use the withholding regime (rather than the estimated tax payment process) to meet their tax payment obligations on a timely basis, minimize the risk of underpayment of taxes, and achieve administrative simplification for taxpayers and the IRS.
Tip of the Day
S corporation losses deferred to bad planning . . . S corporation (or partnership) losses are usually disallowed for one of two reasons--lack of sufficient basis or failure to materially participate in the activity. In one father-son business the taxpayers managed to create the worst of all worlds. They did business through four S corporations (all in the same industry, three owned substantially by the father and one owned only by the son. The son contributed a minimal amount of equity capital. The father had no equity interest but loaned the corporation substantial sums. The three corporations owned by the father were profitable; the one owned by the son was not. But the son couldn't take the losses because he had no basis and the father couldn't take the losses because he had no equity interest (and he didn't materially participate). The losses were lost, but only deferred. Nonetheless, they could have been used to advantage.
November 29, 2013
The IRS enterprise portal will be unavailable beginning Saturday, Dec. 7 from approximately 7:00 a.m., Eastern Time until Sunday, Dec. 8 at 7:00 a.m. for routine maintenance. This outage will affect various enterprise applications such as e-file and e-Services. The IRS asks that all users refrain from submitting returns and other electronic products during this period. A second outage is planned for Saturday, Dec. 21 from 7:00 a.m., Eastern until Sunday, Dec. 22 at 7:00 a.m., also for routine maintenance.
Victims of severe storms, straight-line winds and tornadoes that began on Nov. 17, 2013 in parts of Illinois may qualify for tax relief from the IRS. Following recent disaster declarations for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Illinois will receive tax relief, and other locations may be added in coming days based on additional damage assessments by FEMA. The President has declared the counties of Champaign, Douglas, Fayette, Grundy, Jasper, La Salle, Massac, Pope, Tazewell, Vermilion, Wabash, Washington, Wayne, Will and Woodford a federal disaster area. Individuals who reside or have a business in these counties may qualify for tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Nov. 17, and on or before Feb. 28, 2014, have been postponed to Feb. 28, 2014. The IRS is also waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after Nov. 17, and on or before Dec. 2, as long as the deposits are made by Dec. 2, 2013.
On its Federal income tax return for the taxable year ending (TYE) Mar. 31, 2005, VECO Corp. and subsidiaries (141 T.C. No. 14), an accrual method taxpayer, implemented a proposed change in accounting method and in so doing accelerated deductions for parts of certain liabilities attributable to periods after the close of its taxable year 2005. The IRS rejected the taxpayer's proposed change in accounting method and denied its claimed accelerated deductions. The taxpayer claimed that it was entitled to accelerate the deductions under the "all events" test of Sec. 461 and/or the recurring item exception to the economic performance rules of Sec. 461(h)(3). For financial statement purposes the taxpayer accrued the liabilities over more than one taxable year. The taxpayer treated the liabilities inconsistently for financial statement and tax purposes. The Tax Court held that because neither the required performances nor the payment due dates with respect to the majority of the accelerated deductions occurred before the close of the taxpayer's TYE 2005, it failed to satisfy the first requirement of the all events test of Sec. 461; i.e., the taxpayer failed to prove that all of the events had occurred to establish the fact of the liabilities under Sec. 1.461-1(a)(2)(i) of the regulations. The Court further held that with respect to the remaining accelerated deductions, the taxpayer did not satisfy all of the requirements for the recurring item exception under Sec. 461(h)(3) and, consequently, was not excepted from the general rule of Sec. 461(h)(1) requiring economic performance, because the liabilities underlying the deductions were prorated over more than one taxable year, were treated inconsistently for financial statement and tax purposes, and were material items for tax purposes within the meaning of Sec. 461(h)(3)(A)(iv)(I).
Tip of the Day
Customer service isn't about numbers . . . Most companies just want to get through as many customer calls per representative per hour as possible. That's probably not the best measure of customer satisfaction. Do a survey of customers. Are they satisfied with the rep's response. If customers aren't satisfied at least a portion will take their business elsewhere. Replacing those customers is almost assuredly more expensive than giving them a good customer service experience.
November 27, 2013
The IRS has issued final regulations (T.D. 9644) under Section 1411. These regulations provide guidance on the general application of the Net Investment Income Tax and the computation of Net Investment Income (the 3.8% tax on interest, dividends, rents, etc. for taxpayers with modified AGI in excess of $200,000 ($250,000 married, joint). The regulations affect individuals, estates, and trusts whose incomes meet certain income thresholds.
The IRS has issued final regulations (T.D. 9645) relating to the Additional Hospital Insurance Tax on income above threshold amounts ("Additional Medicare Tax") as added by the Affordable Care Act. These final regulations provide guidance to employers and individuals relating to the implementation of the tax, including the requirement to withhold Additional Medicare Tax on certain wages and compensation, the requirement to file a return reporting the tax, the employer process for adjusting underpayments and overpayments of the tax and the employer and the employer and individual processes for filing a claim for refund for an overpayment of the tax.
The IRS has issued proposed regulations (REG-134417-13) that provide guidance to tax-exempt social welfare organizations on political activities related to candidates that will not be considered to promote social welfare. These regulation will affect tax-exempt social welfare organizations and organizations seeking such status.
How do you define gross receipts? It's not just your net income that can be important. In City Line Candy & Tobacco Corp. (141 T.C. No. 13) the taxpayer was a corporation, and a reseller and licensed wholesale dealer of cigarettes in New York. New York law provides that all cigarettes possessed for sale must bear a stamp issued by the New York tax commissioner. Pursuant to this law, the taxpayer, a licensed cigarette stamping agent for New York, purchased cigarette packs for sale, purchased and affixed cigarette tax stamps to those cigarette packs, and sold the stamped cigarette packs to subjobbers and retailers in New York City and throughout New York State. Under New York law, the taxpayer was required to include, and did include, the cost of the cigarette tax stamps in the sale price of the cigarettes. The taxpayer used the accrual method of accounting and a fiscal year ending Oct. 31. For all relevant years it computed its gross receipts from cigarette sales for financial statement purposes by totaling the gross sale prices of the cigarettes sold during each year. However, for income tax reporting purposes it adjusted its gross receipts from cigarette sales by subtracting the approximate cost of cigarette tax stamps purchased during the fiscal year and reporting as its gross receipts the resulting net amount. The taxpayer argued that its average annual gross receipts (determined for income tax reporting purposes) for the three-taxable-year period ending with the taxable year preceding each of the years in issue did not exceed $10 million. It contended that it qualified for the small reseller exception under Sec. 263A(b)(2)(B) for each of the years in issue and consequently was not required to comply with the uniform capitalization (UNICAP) rules of Sec. 263A with respect to the cigarettes acquired for resale. The Court held the IRS correctly determined the taxpayer's gross receipts for each of the years in issue on the basis of the entire sale price of the cigarettes it sold, including that part of the sale price attributable to the cost of the cigarette tax stamps. The Court also held the taxpayer was subject to the UNICAP rules of Sec. 263A because it failed to prove that its average annual gross receipts did not exceed $10 million for any of the years in issue. The Court further held that the cigarette tax stamp costs are indirect costs that must be capitalized under the UNICAP rules and the cigarette tax stamp costs are handling costs that the IRS properly allocated, in part, to the taxpayer's ending inventory using the simplified resale method.
Tip of the Day
Participating in a trade show? . . . Check the rules in the state where the show is being held. In an advisory opinion one state held that a company's participation at two 5- day trade shows was de minimus, that is too small a connection to subject it to the state's income tax. The corporation did not make any sales or take orders at the show. It merely displayed and demonstrated its products. If you limit your activities to simply demonstrating your products, you should be safe. Once you start taking orders or actually making sales, you'll have to check the laws for that state. There's a good chance you'll not only be subject to sales tax but to income taxes as well.
November 26, 2013
In Estate of Diane Tanenblatt et al. (T.C. Memo. 2013-263) the IRS increased the value of an interest in an LLC that was included in the value of the estate. The parties stipulated copies of the pleadings. In the petition, the taxpayer avered that he obtained a new appraisal, "a copy of which" was attached to the petition. The IRS only admitted that a new appraisal was attached to the petition. The taxpayer argued that the appraisal was admitted in evidence by stipulation and must be considered by the court as expert testimony notwithstanding the taxpayer's failure to qualify the author of the appraisal as an expert pursuant to Fed. R. Evid. 702 or to satisfy Rule 143(g), Tax Court Rules of Practice and Procedure, addressing expert witness reports, and the provisions of the Court's standing pretrial order addressing expert testimony. The Tax Court excluded the appraisal from evidence for failure of the taxpayer to satisfy the preconditions to the Court receiving expert testimony.
In Larry F. Anderson (T.C. Memo. 2013-261) the taxpayer was convicted of tax crimes, including Sec. 7201 tax evasion with respect to his 1991 tax year. The IRS assessed an Sec. 6663(a) civil fraud penalty of $23,104 for the 1991 tax year in August 2008. The IRS issued notice and demand for payment of the $23,104 penalty plus interest of $53,385. The taxpayer offered to compromise this liability, because of doubt as to collectibility as well as effective tax administration, but the IRS rejected the offer and filed a notice of Federal tax lien (NFTL). The taxpayer then timely requested a collection due process hearing to review the rejection of his offer-in-compromise and the filing of the NFTL. Appeals rejected the offer-in-compromise and sustained the filing of the NFTL. The Court noted the IRS may accept an offer based on doubt as to collectibility that is less than the reasonable collection potential if special circumstances are present. The regulations also discuss two scenarios under which the promotion of effective tax administration can be grounds for compromise: (1) if full collection "would cause the taxpayer economic hardship," and (2) if there are "compelling public policy or equity considerations" alleges that Appeals failed to properly consider his medical history in rejecting the offers. The case history indicates that Appeals requested doctor's notes regarding the taxpayer's health and that he was requesting "consideration of the special circumstances surrounding his deteriorating health and advanced age". The Court noted the last offer by the taxpayer was rejected because, according to the officer's notes, the taxpayer "has not shown that health issues are severe or terminal". The Court struggled to reconcile this statement with the physician's diagnosis that the taxpayer's prostate cancer has spread to his bones. The Court held the administrative record was insufficient to determine whether Appeals appropriately considered the taxpayer's health in the determination of his offer in compromise and remanded the case to clarify and supplement the record.
Tip of the Day
Nontaxable workmen's compensation or taxable pension? . . . If you receive workmen's compensation for a job related injury, the benefits are not taxable. On the other hand, pensions received are fully taxable. The distinction is usually, but not always, clear. In some cases the lines blur. For example, if your disability payments are based on age or length of service. And the rule for workmen's compensation does not apply to amounts received as compensation for a non-occupational injury or sickness nor to amounts received as compensation for an occupational injury to the extent that they are in excess of the amount provided in the applicable workmen's compensation acts. If benefits are computed by a formula that does not refer to the employee's age, length of service or prior contributions and are provided to a class that is restricted to employees with service-incurred injuries, sickness or death, then the statute under which the benefits are paid qualifies as a statute in the nature of a workmen's compensation act.
November 25, 2013
In Notice 2013-72 (IRB 2013-48) the IRS announced the minimum amount a domestic worker must earn so that such earnings are covered under Social Security or Medicare for 2014 is $1,900. Earlier this month the IRS announced the contribution and benefit base for remuneration paid (and for self-employment income) in 2014 will be $117,000. The current notice announced the "old law" contribution and benefit base for Social Security for 2014 is $87,000.
Rev. Rul 2013-23 (IRB 2013-48) contains the original issue discount amounts for 2014 under Sec. 1274A. The amount under Sec. 1274A(b) for qualified debt instruments for 2014 is $5,557,200. The amount under Sec. 1274A(c)(2)(A) for a cash method debt instrument is $3,969,500.
In Yitzchok D. Rand et ux. (141 T.C. No. 12) the taxpayers filed a joint income tax return for 2008 improperly claiming three refundable credits: an earned income credit, an additional child tax credit, and a recovery rebate credit. As a result, they claimed a tax refund of $7,327. The parties agree that the correct tax liability was $144. The parties also agree that an accuracy-related penalty applies, but they dispute how the penalty should be calculated, specifically what should be used as the amount shown as the tax on the return. This number affects the amount of the underpayment that serves as the base upon which an accuracy-related penalty is computed. The Tax Court held that when determining the amount shown as tax on the return under Sec. 6664(a)(1)(A), the earned income credit, additional child tax credit, and recovery rebate credit are taken into account but do not reduce the amount shown as tax below zero.
Tip of the Day
Don't try to sell the same customer twice . . . One company just signed up for a new internet service. They were waiting for the installation. In the meantime, they were solicited three times in less than two weeks, asking if they wanted the service. It would be funny if it wasn't sad. There's got to be a significant number of potential or new customers wondering if sloppy marketing is going to be a reflection of sloppy service. While some customers won't care how your business gets there, for many there's more to service than just the final product. Everyone from the receptionist who takes the call to the last contact with the customer reflects on your business. Make sure you're marketing isn't making you look foolish.
November 22, 2013
House Ways and Means Committee Chair Dave Camp, R-Mich. has indicated that he has no plans to pursue changes to the estate and gift tax laws in any tax reform package.
Senate Finance Committee Chair Max Baucus, D-Mont. has introduced a discussion draft that would change the depreciation system using a longer recovery period, increase Sec. 179 expensing to $1 million, eliminate LIFO inventory accounting, and allow more businesses to use the cash accounting method. The draft also suggest eliminating like-kind exchanges and percentage depletion. The full text of the draft is at The Joint Committee on Taxation-JCX-19-13.
In Bradley C. Reifler et ux. (T.C. Memo. 2013-258) the taxpayers filed their on or about the extended due date. Their joint Federal income tax return for 2000 was received by the IRS, but signed under penalties of perjury by the husband, but not by the wife. Upon receipt, the service center date-stamped the return, made handwritten markings indicating a missing signature, and mailed the return back to the taxpayers with a form requesting that the wife sign it and that the taxpayers return it to the service center within 20 days. They did not mail back the 2000 return with the wife's signature as requested. On July 29, 2002, the IRS issued a "Taxpayer Delinquency Notice" to the taxpayers. In response, the taxpayers submitted a second joint Federal income tax return for 2000. The second 2000 return was identical to the first except that it was signed by both the taxpayers opposite a date of Aug. 25, 2002, and bore neither the Oct. 15, 2001, date stamp nor the service center's markings on the original return. It was received by the service center on Sept. 2, 2002. Beginning on July 1, 2005, the IRS obtained from the taxpayers a series of consents extending the period of limitations on assessment and collection for 2000 until June 30, 2010, a date after the May 17, 2010, issuance of the notice of deficiency covering the taxpayers' 2000 tax year. The taxpayers alleged that those consents were invalid because the Sec. 6501(a) period of limitations on assessment and collection with respect to the taxpayers' 2000 Federal income tax expired on Oct. 15, 2004, three years after they filed the initial 2000 return. The Court held the taxpayers were estopped from raising the affirmative defense of the period of limitations with regard to any 2000 deficiencies; 2000 remains open for assessment and collection of Federal income tax. The return they filed on the extended due date was not a valid return because it was not signed by both spouses. The first valid return was the one dated August 25, 2002.
Tip of the Day
Looking for business capital? . . . You're proud that you started the business in your garage and now do $12 million in sales between one brick and mortar location and the Web. Not only that, you've got margins to die for. But you're still in charge of virtually everything. You make all the purchasing as well as financial and marketing decisions. You're looking for capital to expand the number of locations and your Web presence. While you might think you're a prime candidate for an attractive offer, you're probably not. Why? Everything hinges on your presence. You've got no backup. The good news is the problem can probably be remedied. But it could take some time. Another point. The business would probably not be easy to sell--for the same reason.
November 21, 2013
The Internal Revenue Service Advisory Council (IRSAC) has released its annual report featuring recommendations on a wide range of tax administration matters. IRSAC is an advisory group to the entire agency. IRSAC’s primary purpose is to provide an organized public forum for senior IRS executives and representatives of the public to discuss relevant tax issues. Based on its findings and discussions, IRSAC made several recommendations on a broad array of issues and concerns including:
For the full report, go to IRSAC Public Meeting Briefing Book.
Senate Finance Committee Chair Max Baucus, D-Mont. has released a discussion draft on international business tax reform. The draft presented suggests tax all foreign income of U.S. companies immediately or not at all. The staff discussion draftends the lock-out effect and replaces the deferral system with a new, more competitive system under which all income of foreign subsidiaries of U.S. companies is taxed immediately when earned or is exempt from U.S. tax, after which no additional U.S. tax is due. Specifically:
The discussion draft promotes the following objectives:
In an effort to eliminate opportunities to avoid U.S. tax on U.S. income the staff discussion draft:
As part of his work towards federal tax reform, Senate Finance Committee Chair Max Baucus, D-Mont. is releasing a staff discussion draft of proposed reforms to the administration of the tax laws. The draft suggests changes that would reduce the taxpayer compliance burden while reducing the opportunity for identity theft and tax fraud. Important changes include more electronic filing of information and tax returns.
Tip of the Day
Fraternity loses tax exemption . . . If you've got a tax-exempt status, you want to make sure your operations remain within the limitations of the exemption. In a recent Letter Ruling (LTR 201344011) the IRS held the fraternity did not qualify for exemption as an organization described in Sec. 501(c)(7) because non-member income consistently exceed the 15 percent limitation of total income for the two years under examination. Non-member income sources consisted of charitable gaming, sales of ink markers, and sales of food and drink. The IRS added that the organization did not qualify under Sec. 501(c)(4) because it was not engaged primarily in social welfare activities.
November 20, 2013
In Kulwant S. Pawar et ux. (T.C. Memo. 2013-257) the taxpayers sold cars through their dealership and at auction. Cars sold through the dealership had to be reported to the state when sold. The taxpayer-wife handled the paperwork for the dealership. Neither she, their outside CPA, or anyone else handled the paperwork in connection with the auction sales. The taxpayer's CPA prepared the federal income tax returns using the state sales tax returns from the dealership and carbon copies of checks. The taxpayers provided no receipts, loan documents, nor records of cash or cashier's check transaction to the CPA for the preparation of their return. They did not provide the CPA with records of their auction sale activities because they failed to keep such records. The Court agreed that the taxpayers had unrecorded income. It did reduce the IRS's amount of such income by some bank transfers not accounted for by the IRS. The Court rejected the taxpayers' argument that a $10,000 represented loan proceeds because the handwritten note was unreliable and there was no supporting documentation.
In John Francis Barrett et ux. (T.C. Memo. 2013-256) the issue for decision was whether collateral estoppel effect should be given to decisions in earlier cases determining that different taxes for different years were "currently not collectible" and if not whether the determination by the IRS was an abuse of discretion. The Court noted for collateral estoppel to apply to an issue, among other things the issue to be decided in the second case must be identical to the issue decided in the first case; the parties must have actually litigated the issue and the resolution of the issue must have been essential to the prior decision; and the controlling facts and legal principles must remain unchanged. The Court held collateral estoppel did not apply to the circumstances in this case. A well-established principle is that the Commissioner may challenge in a succeeding year what was accepted in a previous year. There was no abuse of discretion to sustain the proposed collection action where the taxpayer did not provide updated financial information and rejected an installment agreement offered by the Appeals Office.
Tip of the Day
Checks made to "cash" . . . You know the drill. Madison Aborists trims some trees on your rental property and wants either cash or a check made out to cash. A check made to cash carries virtually no weight as proof of an expense. You could just as easily have given that check to your niece for her 16th birthday. While it's best to avoid paying business expenses in cash or a check made to cash, sometimes that's just not possible. If you want to increase your chances of having that deduction upheld, make sure you've got documentation such as an invoice marked paid, or some similar backup. Additional potential backup will depend on the situation. Before and after pictures might help. Talk to your tax advisor. And keep in mind that you may have to send a 1099 to the vendor.
November 19, 2013
In Abdalla Mohamed (T.C. Memo. 2013-255) the taxpayer was a fugitive from justice who underpaid his 2006 and 2007 taxes. The IRS determined a fraud penalty (Sec. 6663(a)) for each year. The taxpayer's business partner, not the taxpayer, signed the 2007 return prepared for the taxpayer. The IRS received the 2007 return and processed it as the taxpayer's. The Tax Court held that because the business partner was not properly authorized to sign the 2007 return, it was not a value return for purposes of Sec. 6663(a). The Court also held the Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment, signed by the taxpayer's agent is not a return. The Court further held that because the IRS failed to prove that the taxpayer deliberately filed his 2007 return after the due date, the Court would not sustain a delinquency addition to tax under Sec. 6651 for fraudulent failure to file a return. Finally, the Court did hold the taxpayer was liable for the fraud penalty for the other year, 2006.
A qualified conservation contribution of an easement for the facade of a building can be a win-win. You get a charitable contribution deduction on your taxes, and the only thing given up is the right to change the facade. Generally, that wouldn't be done. But there are a number of requirements, and even if you pass those hurdles, you still have to value the easement. In George Gorra et ux. (T.C. Memo. 2013-254) that's where the taxpayer ran into trouble. The taxpayers valued the easement at $605,000; the IRS claimed it had no value. The Tax Court concluded the value was $104,000. Since the taxpayer's valuation was greater than 200% of the amount determined to be the correct value, the Court found they were liable for a 40% penalty on the portion of the underpayment attributable to the gross valuation misstatement.
Tip of the Day
College insurance . . . You just sent the kids off to school along with their laptops, tablets, smartphones, etc., but are those items insured? Twenty-five years ago the most expensive required item might have been a calculator. There's a good chance your child's items are covered under your homeowner's insurance, but only if he or she is still a dependent. Check with your insurance company to make sure. You might have to provide certain additional information to insure coverage. If they're not covered, ask your agent how to add coverage or where you can get it.
November 18, 2013
The IRS has announced that during November and December, it will send letters to preparers suspected of filing inaccurate EITC claims. The letters detail the critical issues identified on the returns, explain the consequences of filing inaccurate claims for EITC and advise preparers that IRS will continue monitoring the types of EITC claims they file. Filing inaccurate EITC claims may result in penalty assessment, revocation of IRS e-file privileges and other consequences including barring preparers from tax return preparation. IRS also plans to conduct visits to some tax preparers to provide education and outreach on meeting EITC Due Diligence requirements.
The IRS has issued proposed regulations (REG-120927-13) that would clarify that amounts paid to an Indian tribe member as remuneration for services performed in a fishing rights-related activity may be treated as compensation for purposes of applying the limits on qualified plan benefits and contributions. These regulations would affect sponsors of, and participants in, employee benefit plans of Indian tribal governments.
Tip of the Day
Refundable vs. nonrefundable credits . . . There are number of different personal federal tax credits, and the credits can be refundable or nonrefundable. Nonrefundable credits can only be used up to your federal income tax liability. With a refundable credit any amount remaining after offsetting your liability will be sent to you as an additional refund. The three most frequently encountered refundable credits are the earned income tax credit and the refundable portions of the child credit and the American Opportunity Tax Credit. The most frequently encountered nonrefundable credits, are the foreign tax credit, a portion of the child credit, residential energy credits and the electric vehicle credits.
November 15, 2013
T.D. 9641 contains amendments to regulations relating to certain cash or deferred arrangements under section 401(k) and matching contributions and employee contributions under section 401(m). These regulations provide guidance on permitted mid-year reductions or suspensions of safe harbor nonelective contributions in certain circumstances for amendments adopted after May 18, 2009. These regulations also revise the requirements for permitted mid-year reductions or suspensions of safe harbor matching contributions for plan years beginning on or after January 1, 2015. The regulations affect administrators of, employers maintaining, participants in, and beneficiaries of certain defined contribution plans that satisfy the nondiscrimination tests of section 401(k)and section 401(m) using one of the design-based safe harbors.
Tip of the Day
Where do we stand on tax reform? . . . It looks more and more like there will be cutbacks in "tax expenditures", the technical term for deductions, credits, loopholes, etc. President Reagan was able to reduce tax rates in part by eliminating most interest deductions for individuals, adding a floor on miscellaneous itemized deductions, putting restrictions on the deduction for passive losses, and effectively eliminating the tax shelter industry. But that's easier said than done. Eliminating the other fellow's deduction is OK; eliminating mine is not. And things are far from settled on the House and Senate. House Ways and Means Committee Chair Dave Camp, R-Mich. has indicated he may not release a tax reform bill before the end of the year, but Senate Finance Committee Chair Max Baucus, D-Mont. may release discussion drafts on his own. With little time left before the end of the year, any proposal that can assist in tax planning seems unlikely.
November 14, 2013
U.S. District Judge Kimba M. Wood of the Southern District of New York entered an order on Nov. 7, 2013, authorizing the IRS to issue summonses requiring Bank of New York Mellon (Mellon) and Citibank NA (Citibank) to produce information about U.S. taxpayers who may be evading or have evaded federal taxes by holding interests in undisclosed accounts at Zurcher Kantonalbank and its affiliates (collectively, ZKB) in Switzerland; and U.S. District Judge Richard M. Berman of the Southern District of New York entered an order today authorizing the IRS to issue summonses requiring Mellon, Citibank, JPMorgan Chase Bank NA (JPMorgan), HSBC Bank USA NA (HSBC), and Bank of America NA (Bank of America) to produce similar information in connection with undisclosed accounts at The Bank of N.T. Butterfield & Son Limited and its affiliates (collectively, Butterfield) in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the United Kingdom.
In Mary Johnson et vir (U.S. Court of Appeals, Fourth Circuit) the taxpayer was the sole shareholder of a corporation operated by her husband. The wife's ownership of the business was necessary because she was not encumbered by a lien like her husband. That allowed the corporation to enter into leases and other contracts as well as obtain a line of credit. The wife delegated her authority in the corporation to her husband. She came to work only once per month. She would sign checks in her husband's absence, but only those he had approved. Until she received an IRS notice regarding unpaid payroll taxes she was unaware of a problem, but after learning of the issue, took steps to correct the issue going forward. However, corporation did not pay the delinquent taxes from earlier years and the corporation continued to pay other business debts and employee wages, including those of the taxpayer. THe IRS filed for judgement against both the husband and wife for the unpaid taxes, claiming both as responsible persons. The Court sided with the lower court in finding Mrs. Johnson a responsible person and that she acted willfully in failing to see the withholding taxes were paid. The Court noted she cashed paychecks totaling almost $500,000 during the time the payroll taxes went unpaid.
Tip of the Day
Stock market ready for a correction? . . . That's what some professionals are saying. Timing the market is difficult for the experts; ordinary investors have less of a chance of being right. But the market has gained significant ground very quickly. That doesn't mean the bottom will fall out, but it means it's less likely that it will score big gains from here on. Now would be a good time to become more cautious. Talk to your investment advisor. You might want to review your portfolio before year end, taking some profits.
November 13, 2013
In Ronald Isley (141 T.C. No. 11) the taxpayer was a founding member of the popular Isley Brothers singing group, which for many years generated substantial income from personal appearances and record sales. He failed to pay Federal income tax on much of that income. The IRS sought to collect unpaid tax for all but five years within the 1971-95 period by filing proofs of claim in two bankruptcy proceedings (bankruptcies I & II), which resulted in his collection of substantial amounts from the taxpayer. The United States also obtained the taxpayer's criminal conviction for tax evasion and willful failure to file with respect to 1997-2002 (conviction years), which resulted in his being sentenced, to 37 months in prison followed by a three-year probationary period during which he was required to discharge his liabilities for the conviction years and his tax filing and payment obligations for the probation years. After bankruptcy II, the taxpayer instituted an unsuccessful suit for the refund of amounts that the IRS collected in that bankruptcy proceeding that the taxpayer alleged should have been offset by payments emanating from bankruptcy I. The IRS issued to the taxpayer two notices of Federal tax lien (NFTLs) and two notices of levy that together covered his assessed liabilities for the conviction years plus 2003, 2004, and 2006. The taxpayer requested a collection due process (CDP) hearing, which resulted in his offer and the Appeals officer's preliminary acceptance of an offer-in-compromise (OIC). The Appeals officer referred the OIC to an attorney in the IRS's Office of Chief Counsel, for review. The attorney recommended the OIC be rejected because the conviction years (which were covered by the OIC), had been referred to the Department of Justice (DOJ) for prosecution so that the IRS was prohibited by Sec. 7122(a) from unilaterally compromising the taxpayer's liabilities for those years, and also because the Appeals officer had overlooked (1) potential sources for the collection of more than the taxpayer had offered and (2) his noncompliance with the terms of the OIC. Following the attorney's advice, Appeals rejected the OIC and sustained the NFTL filings and the levy notices. The taxpayer sought to have the OIC reinstated on the ground that (1) Sec. 7122(a) did not prohibit Appeals from entering into an OIC pursuant to Sec. 6330(c)(2) and (3); (2) the attorney's involvement effectively made him the "de facto" Appeals officer, and, because of his earlier involvement in bankruptcy II, his involvement in the taxpayer's CDP hearing violated the "impartial officer" requirement of Sec. 6330(b)(3); and (3) as the "de facto" Appeals officer, his improper ex parte communications with non-Appeals IRS personnel require that we disregard his rejection of the OIC and ratify Appeals' initial acceptance of it. The taxpayer also renews the argument, made in his unsuccessful refund suit, that the assessed liabilities are overstated because the Commissioner did not properly credit to his account payments made to the Commissioner at the conclusion of bankruptcy I (offset issue). Lastly, the taxpayer argued that, should we uphold Appeals' rejection of his OIC, we must order a refund of the 20% partial payment that he made pursuant to Sec. 7122(c) because the taxpayer was induced to submit the OIC under false pretenses. The Court held that Sec. 7122(a) barred Appeals' unilateral acceptance of the taxpayer's OIC and the attorney's advice was properly requested and furnished to the Appeals officer pursuant to Sec. 7122(b). Thus, his involvement did not cause him to become the "de facto" Appeals officer and, therefore, could not and did not result in (1) a violation of the "impartial officer" requirement of Sec. 6330(b)(3), or (2) improper ex parte communications between Appeals and non-Appeals IRS personnel. The Court also held that because (1) bankruptcy II gave him a prior opportunity to raise the offset issue, and (2) his position with respect to that issue was rejected in his unsuccessful refund suit, Sec. 6330(c)(2)(B) and (4)(A) alternatively barred him from raising that issue during his CDP hearing. The Court held further that the taxpayer was not invited to submit his OIC under false pretenses. Therefore, pursuant to the normal rules providing for the nonrefundability of the 20% partial payment required by Sec. 7122(c) (which the taxpayer does not dispute), he is not entitled to a refund of that payment and Appeals' determination not to withdraw the NFTLs is sustained. Finally, the Court held that Appeals' determination to sustain the notices of levy and proceed with collection by levy of the assessed liabilities is rejected and the case is remanded to Appeals to explore the possibility of a new OIC or installment agreement, not to be finalized until approved by DOJ pursuant Sec. 7122(a).
Tip of the Day
Bonuses--year deductible . . . If you're on the accrual method of accounting, you can deduct amounts in one year that are paid in the following year, but only if (1) all the events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect to the liability. That means that in order to deduct bonuses in 2013, the amount is determined with certainty and you have a legal obligation to pay the amount at the end of the year. If there is doubt as to the amount or there's no legal obligation, you can't deduct the amount until actually paid. Check with your tax advisor to be sure. Make sure you provide him or her with all the facts. If the deduction in 2013 would be valuable, you may want to cut the checks this year and deal with the cash flow consequences.
November 12, 2013
The Justice Department announced that a U.S. District Court has entered a permanent injunction ordering ITS Financial LLC, the parent company of the Instant Tax Service franchise, to cease operating. The injunction also bars Fesum Ogbazion, the sole owner and CEO of ITS Financial, from operating or being involved with any business relating to tax-return preparation. The court issued the order following a two-week trial in Cincinnati in June 2013. Instant Tax Service, which is based in Dayton, Ohio, claimed to be the fourth-largest tax-preparation firm in the nation. According to the court, ITS Financial had about 150 franchisees that filed over 100,000 tax returns each year in 2011 and 2012. Two other entities owned by Ogbazion, Tax Tree LLC and TCA Financial LLC, were also defendants in the case and were also ordered to cease operating.
Final rules (T.D. 9640) have been issued implementing the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008, which requires parity between mental health or substance use disorder benefits and medical/surgical benefits with respect to financial requirements and treatment limitations under group health plans and group and individual health insurance coverage.
The IRS has announced Tommy Edward Clack pleaded guilty in federal court in Greensboro, N.C., to one count of willfully filing a false federal income tax return and one count of knowingly making a false statement to a federally-insured bank in order to obtain a mortgage loan. According to filings with the court, for approximately the past 10 years Clack has been an itinerant, self-employed paving contractor. Clack operated under several different business names, and he changed the names of his paving business frequently in order to avoid scrutiny by state and federal law enforcement agencies. As a result of his business practices, over the years Clack was charged with multiple state criminal violations in Maryland, North Carolina, South Carolina and Florida. Since June 2010, Clack has been under an injunction banning him from operating as a driveway paving contractor in North Carolina. He is also subject to a cease-and-desist order in Maryland banning him from various fraudulent practices. According to court documents, Clack significantly underreported the income from his paving business on his tax returns. From 2004 to 2007, Clack earned gross income of over $5.7 million, but reported only a fraction of it to the IRS. Clack underreported his income by approximately $294,829 in 2004; $1,178,822 in 2005; $1,868,556 in 2006 and $2,428,710 in 2007. Clack's returns were prepared by an accountant, but Clack knowingly provided her with false information upon which to base Clack's returns, and signed his returns knowing that they significantly understated his income. Altogether, as a result of these false returns Clack underpaid his taxes during this period by approximately $1,350,597. To conceal his tax fraud, Clack employed a number of strategies: he did not maintain books and records, dealt extensively in cash, paid his employees in cash and structured currency transactions with his bank in amounts designed to evade the bank's requirement to file Currency Transaction Reports with the IRS. Court documents state that in 2003, Clack submitted a mortgage loan application in the name of his then-wife to a bank in Greensboro. The application sought a $640,000 loan to finance the purchase of a $1.2 million home. As part of the loan application, Clack provided the bank with a 2002 tax return in his wife's name, which reported adjusted gross income of $372,748 and claimed total tax liability of $127,745. Clack represented that this tax return had been filed with the IRS, when in fact it had not been. In fact, Clack and his then-wife had filed a 2002 joint federal income tax return which claimed that the couple had adjusted gross income of $ 17,656 and total tax liability of $2,685. Had the bank known of the discrepancy, they would not have issued the loan. Clack ultimately defaulted on the loan, and the bank suffered a loss after foreclosing the collateral. For the false tax return charge, Clack faces a maximum of three years in prison, one year of supervised release and a maximum fine of $250,000. Clack faces a maximum of 30 years in prison, five years of supervised release and a maximum fine of $1,000,000 for the bank fraud count.
Tip of the Day
Offer a freebie . . . Free is probably one of the best four-letter words. Getting something for free satisfies a very important urge. Often the freebie can be something of such a small value it has little effect on your bottom line. The best freebie is one related to the product or service you're selling. Your regular customer comes in for a brake job. You do all the work on his car. You notice a bad windshield wiper. Replacing it for free (give him the old wiper) will go a long way. Upgrades work too, if they're visible and the customer is aware he's getting a higher valued item. How much you can afford to give away will depend on the product or service your selling.
November 8, 2013
The Congressional Research Service has issued a report on the expiring tax provisions, indicating that Congress may address expiring tax provisions as part of tax reform, making some a permanent part of the tax code. Congress may also decide to enact another extender package containing some or all of the provisions set to expire at the end of 2013. While Congress is actively pursuing tax reform, if an extender package is not passed by year end it's still possible some provisions will be extended retroactively.
Identity theft continues to be a serious and growing problem which has a significant impact on tax administration. Undetected tax refund fraud results in significant unintended Federal outlays and erodes taxpayer confidence in the Federal tax system. In a follow-up to a July 2012 audit report the Treasury Inspector General for Tax Administration (TIGTA) found that expanded identity theft detection efforts by the IRS are helping identify fraudulent tax returns. However, billions of dollars in potentially fraudulent refunds continue to be paid. An analysis of Tax Year 2011 tax returns identified approximately 1.1 million undetected tax returns filed using a Social Security Number that have the same characteristics of IRS-confirmed identity theft tax returns. Potentially fraudulent tax refunds issued total approximately $3.6 billion, which is down by $1.6 billion compared to the $5.2 billion TIGTA reported for Tax Year 2010. In addition, TIGTA expanded its Tax Year 2011 analysis to include tax returns for which the primary Taxpayer Identification Number on the tax return is an Individual Taxpayer Identification Number (ITIN). TIGTA identified more than 141,000 Tax Year 2011 tax returns filed with an ITIN that have the same characteristics as IRS- confirmed identity theft tax returns involving an ITIN. Potentially fraudulent tax refunds issued for these undetected tax returns totaled approximately $385 million. Lastly, the IRS has still not taken actions to prevent multiple tax refunds from being deposited to the same bank account. This continues to provide identity thieves with an easy method to obtain fraudulent tax refunds. TIGTA recommended that the Commissioner, Wage and Investment Division: 1) deactivate ITINs assigned to individuals prior to January 1, 2013, who no longer have a tax filing requirement in an effort to reduce tax filing fraud and 2) continue to analyze the characteristics of identity theft tax returns, including using the characteristics of questionable ITIN application data to expand identity theft filters.
Think a deduction is so obvious you don't need proof? In Edward J. Fine (T.C. Memo. 2013-248) the Tax Court denied the taxpayer a deduction for mortgage interest because he was unable to show any documentation. The Court noted a taxpayer's self-serving declaration and uncorroborated testimony is generally not a sufficient substitute for records.
Tip of the Day
Net operating losses . . . If you do business as a C corporation and have a net loss, the loss can be carried back and/or forward to offset income in other years. If you do business as an S corporation, partnership, LLC, etc. the loss is reported on your individual return and you can have a net operating loss that can be carried back and/or forward. (See our article Deducting Net Operating Losses for more information.) But the rules can be very different for state purposes. Many states don't allow the deduction for net operating losses. That can make tax planning more challenging.
Copyright 2013 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. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536