Small Business Taxes & Management

News and Tip of the Day

Small Business Taxes & ManagementTM--Copyright 2014, A/N Group, Inc.

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August 29, 2014


You can only deduct losses in an S corporation up to your basis. In Blonde Grayson Hall, deceased et al. (T.C. Memo. 2014-171) the taxpayer argued that two deposits made into the S corporation's bank account were loans, but did not provide to show the amounts were loans. The Court disallowed any increase in basis for the claimed amounts. On another issue, the taxpayer could not show that invoices for forensic accounting services for the husband's and the wife's businesses and for the taxpayers as individuals that were sent to the wife's business were both deductible on the wife's business.

Under the innocent spouse rules you may be able to avoid some of your liability for a joint return if you meet certain requirements. The IRS will consider granting relief regardless of whether the underpayment is attributable to the requesting spouse if the requesting spouse did not know, and had no reason to know, that funds intended for the payment of tax were misappropriated by the nonrequesting spouse for his or her benefit. In Brian Hammernik (T.C. Memo. 2014-170) the taxpayer claimed he set aside money from the funds in his withdrawn retirement account in a joint checking account to pay the liability but his spouse withdrew the funds in anticipation of their divorce. The Court found the taxpayer was unable to corroborate his allegation that the money was actually set aside for the payment of his tax liability. He failed to provide any bank records or other documentation. The Court denied the request for relief.

Tip of the Day

State tax audits . . . The IRS isn't the only agency that can audit your return. While your chances of a state audit are generally less, they certainly aren't negligible. From an individual standpoint, states most often concentrate on items that are different than the federal. For example, for state purposes an item such as retirement income may be nontaxable under certain circumstances. Or where qualification for a benefit for state purposes is different than federal. States also frequently audit nonresidents who earn income or have property in the state. Got a rental property in California? California is entitled to tax the income from that property. Partner in a partnership? You may have to file in the states in which the partnership does business. For businesses, having an office in the state (there are other criteria) may subject you to income tax. States are always on the prowl for nonfilers. And, of course, if you have a business, you've got a chance of a sales tax audit.


August 28, 2014


The IRS has issued final regulations (T.D. 9691) relating to the application of the straddle rules to a debt instrument. The final regulations clarify that a taxpayer's obligation under a debt instrument can be a position in personal property that is part of a straddle. The final regulations primarily affect taxpayers that issue debt instruments that provide for one or more payments that reference the value of personal property or a position in personal property.

The disaster area notice for Minnesota (for severe storms, straight-line winds, flooding, landslides, and mudslides which began on June 11, 2014) has been amended to include the counties of Hennepin and Ramsey.

The IRS has announced the release of the 2014-2015 Priority Guidance Plan. The Plan represents guidance the IRS intents to work on actively during the plan year (July 2014-June 2015) and does not place any deadline on completion of projects. The Appendix lists the more routine guidance that is generally published during the year. You can download the Plan at

Tip of the Day

Rental property and personal use . . . If you use a vacation home or other rental property more than the greater of 14 days or 10% of the total days it is rented to others at a fair rental, you'll have to divide the expenses between personal and rental use. If you're using the property during a time you're working on it--cleaning, painting, repairs, etc. (but not improving)--those count as maintenance, not personal days. The rule is in order to qualify as a maintenance day, you must be working on the property substantially full time. The day is still a maintenance day if family members use the property for recreational purposes on the same day. Caution. If you claim you claim time spent as maintenance days be sure you can back it up. Don't be surprised if the IRS asks you to prove it. Keep a log of the work performed and related activities.


August 27, 2014


As a result of severe storms and flooding which began on June 25, 2014 in certain areas of North Dakota, taxpayers in the counties of Benson, Boltineau, Divide, Eddy, McHenry, Mountrail, Pierce, Renville, and Ward and the Standing Rock Indian Reservation who sustained losses attributable to the disaster may be eligible to deduct the losses on their 2013 federal income tax returns.

If your S corporation or partnership (or even sole proprietorship) has significant losses and your participation in the business isn't obvious your claim to the losses could be challenged. That's what happened in Charles E. Wade et ux. (T.C. Memo. 2014-169). The taxpayer held a substantial interest in several corporations that he started and once actively managed. He reduced his management activities and moved away from the plant, but was still active in developing business and product development. The IRS argued he did not meet the material participation requirements. The Tax Court sided with the taxpayers in finding that the taxpayer participated in the companies' activities on a regular, continuous, and substantial basis, one of the tests for material participation. The Court also noted that the provision was written into the law by Congress in an effort to deter mere investors from deducting losses. That was not the case here.

Tip of the Day

Alternative sources for a loan? . . . If the bank turns you down, you may have other options. There are non-bank lenders who may be more accommodating. The downside is that the interest rate is likely to be higher. But a good track record with one of these lenders may make it easier to get a better deal in the future. Other options include asset-based loans. That is pledging collateral such as fixed assets, accounts receivable, etc. You should also try the Small Business Administration. And some lenders may be more amenable to particular borrowers. For example, a local bank that knows the area may be more willing that a bigger regional bank. And some banks and lenders specialize in certain industries. They may be quicker to work with you. They may be able to give you positive financial and business advice. Finally, many states now have agencies that can provide advice and/or assistance.


August 26, 2014


The IRS has issued interim final regulations (T.D. 9690) regarding coverage of certain preventive services under section 2713 of the Public Health Service Act, added by the Patient Protection and Affordable Care Act. The regulations provide guidance to group health plans established or maintained by certain religious employers with respect to exemption from the otherwise applicable requirement to cover certain contraceptive services.

As a result of severe storms, tornadoes, straight-line winds, and flooding which began on June 5, 2014 in certain areas of Tennessee, taxpayers in the counties of Anderson, Bledsoe, Carroll, Decatur, Henry, Hickman, Houston, Lawrence, Lewis, Madison, Marion, Maury, McNairy, Moore, Perry, Roane, Sequatchie, and Tipton who sustained losses attributable to the disaster may be eligible to deduct the losses on their 2013 federal income tax returns.

As a result of severe storms, tornadoes, straight-line winds, and flooding which began on June 26, 2014 in certain areas of Iowa, taxpayers in the counties of Audubon, Black Hawk, Butler, Cedar, Des Moines, Grundy, Hamilton, Hardin, Ida, Iowa, Jackson, Jasper, Johnson, Jones, Keokuk, Lee, Linn, Mahaska, Muscatine, Poweshiek, Tama, and Washington, who sustained losses attributable to the disaster may be eligible to deduct the losses on their 2013 federal income tax returns.

As a result of wildfires that began on July 9, 2014 in certain areas of Washington, taxpayers in Okanogan County and the Confederated Tribes of the Colville Reservation who sustained losses attributable to the disaster may be eligible to deduct the losses on their 2013 federal income tax returns.

As a result of severe storms, straight-line winds, flooding, landslides, and mudslides which began on June 11, 2014 in certain areas of Minnesota, taxpayers in the counties of Beltrami, Blue Earth, Brown, Carver, Dodge, Faribault, Koochiching, La Qui Parle, Lake of the Woods, Le Sueur, Lyon, Marshall, Martin, McLeod, Nicollet, Redwood, Rice, Roseau, Scott, Sibley, Steele, Todd, Wadena, Waseca, Watonwan, Wright, Wright, and Yellow Medicine and the Red Lake Band of Chippewea, the Prairie Island Indian Community Tribes and the Bois Forte Band of Chippewa within Koochiching County who sustained losses attributable to the disaster may be eligible to deduct the losses on their 2013 federal income tax returns.

Tip of the Day

Renting vacation home? . . . If you rent for more than 7 days at a time on average, your rental falls under the regular passive loss rules for rental income and losses. That is, net losses are deductible up to $25,000 per year, subject to the phaseout if your AGI is over $100,000. In order to deduct the losses you need only actively participate in the management of the property. That's an easy test to pass. On the other hand, if the property is rented, on average, for 7 days or less, it doesn't qualify for this exception. In order to deduct the losses you must show you materially participate in the activity. That's a tough test. In fact, it's unlikely you'll pass it unless you operate a B and B. The losses aren't lost, just suspended until the property is disposed of or they can be used against passive income. Talk to your tax advisor if you're thinking of renting your property for short periods.


August 25, 2014


Revenue Procedure 2014-49 (IRB 2014-37) which, in the context of a Major Disaster, provides temporary relief from certain requirements of Sec. 42 of the Code for Agencies and Owners. The revenue procedure also provides emergency housing relief for individuals who are displaced by a Major Disaster from their principal residences in certain Major Disaster Areas.

Revenue Procedure 2014-50 (IRB 2014-37), which automatically suspends certain requirements under Sec. 142(d) for qualified residential rental projects financed with exempt facility bonds issued by state and local governments under Sec. 142. The revenue procedure suspends these requirements for one year following a Presidential declaration of a qualifying major disaster. During this period, the revenue procedure suspends the income requirements for units occupied by individuals displaced by the disaster and modifies other requirements of Sec. 142(d) to accommodate this suspension.

Tip of the Day

Rental property and personal use . . . If you use a vacation home or other rental property more than the greater of 14 days or 10% of the total days it is rented to others at a fair rental, you'll have to divide the expenses between personal and rental use. If you're using the property during a time you're working on it--cleaning, painting, repairs, etc. (but not improving)--those count as maintenance, not personal days. The rule is in order to qualify as a maintenance day, you must be working on the property substantially full time. The day is still a maintenance day if family members use the property for recreational purposes on the same day. Caution. If you claim you claim time spent as maintenance days be sure you can back it up. Don't be surprised if the IRS asks you to prove it. Keep a log of the work performed and related activities.


August 22, 2014


You may be able to recover your litigation costs in a dispute with the IRS, but you've got to meet several requirements. In Robert S. McQuate et ux. (T.C. Memo. 2014-165) the taxpayers erred in reporting the same income twice on their return. That created a deficiency. When the taxpayers realized the problem and tried to correct it the IRS required documentation. The Court noted a letter from the taxpayer did not make the problem with this particular year (three years of amended returns were at issue) clear and once the IRS had the documentation necessary to resolve the dispute, the IRS conceded that no deficiency existed. The Court held the IRS's position was substantially justified and denied the taxpayers their litigation costs.

If you receive a check before the end of the year, you're generally in constructive receipt and have income even if you don't cash the check. In David Shiner v. Bernard I. Turnoy (U.S. District Court, Northern Dist. Ill. East. Div.) Shiner received a check from Turnoy at the end of the year that was for less than the amount due him. The check had a notation "endorsement constitutes full & absolute release/hold-harmless by Shiner &/or all interested persons/parties, as per cover letter". The cover letter indicated Turnoy was going to send the taxpayer a Form 1099 for that amount. Shiner did not cash the check (ultimately returning it to Turnoy) and filed a lawsuit charging breach of contract. Turnoy's accountant, at his direction, prepared a 1099 for Shiner. Turnoy kept sufficient funds in the bank to cover the check until late February. Shiner argued that the endorsement language qualified as substantial limitations or restrictions. The Court sided with Shiner and held that he did not have constructive receipt of the funds and that Turnoy willfully filed a false information return (Form 1099).

Tip of the Day

Urgency in contract . . . Many contracts contain a clause referencing a closing or delivery date and that time is of the essence, but in some cases those clauses may not be sufficient. For example, you want to close on the purchase of some equipment before the end of the year to claim a deduction in the current year. Or you're doing a like-kind exchange and don't want to miss the 180-day deadline. Talk to your attorney about the proper wording and the possibility of adding a penalty clause to provide the other party with an incentive to make sure the deal closes on time.


August 21, 2014


Thinking of renting your principal residence when you're not using it? In Harrison R. Hunter (T.C. Memo. 2014-164) the taxpayer was a merchant marine who was at seat for long periods of time. He rented the residence to a friend who agreed to pay rent and utilities, but the amount was less than the market and she only paid a month's rent. The taxpayer made no attempt to collect the amount owed. The Court sided with the IRS in disallowing a deduction for rental losses, noting that the taxpayer failed to prove the house was rented at a fair market rent. The Court also noted no attempt was made to collect the unpaid rent. Finally, the taxpayer could not show how much time he spent in the house. He provided no information regarding how much time he was not at sea (if any) and where he stayed during those times.

Tip of the Day

Multiple entities . . . Should you start a new corporation, partnership or LLC if you're starting another business? This is mostly a legal question. Here are a number of factors to consider:


August 20, 2014


Check the fine print. In Marco Zarlengo et ux. (T.C. Memo. 2014-161) the Tax Court held that the taxpayer's contribution of a facade easement took place in the year after the deduction was claimed. Under state law (New York) an instrument purporting to create, convey, modify, or terminate a conservation easement is not effective unless recorded and the easement wasn't recorded until the following year. The Court found that although the appraisal contained some technical flaws (including the fact that it was issued 60 days before the contribution) the provisions of the appropriate regulation section was directory, requiring substantial compliance, rather than mandatory, requiring strict compliance and the Court allowed the appraisal but determined the value of the contribution to be lower than that claimed.

Tip of the Day

Keep your place of business ship-shape . . . A dirty break room, rodents or insects in the office, etc. can be an OSHA violation. While most OSHA violations involve issues on the factory floor, warehouses, etc., offices are not immune. All you need is a disgruntled employee to file a complaint. There's a better chance of a visit from the local board of health or, in the case of a workspace that's unsafe as a result of clutter from files, equipment, etc. a visit from the fire marshal. Even if the fine is insignificant, you could find yourself getting return visits. Don't ignore a warning or citation. That too, could be costly.


August 19, 2014


Rev. Rul. 2014-21 (IRB 2014-34) contains a list of the average annual effective interest rates on new loans under the Farm Credit System. These rates are used under Sec. 2032A(e)(7)(A)(ii) in computing the special use value of real property used as a farm for which an election is made under Sec. 2032A.

In John C. Bedrosian et ux. (143 T.C. No. 4) the taxpayer invested in a Son-of-BOSS transaction through a partnership that was subject to TEFRA. The IRS issued an FPAA with respect to the partnership; the IRS include with the FPAA a notice under Sec. 6223(e) informing the taxpayers of their right to opt out of the TEFRA proceeding. The FPAA was properly mailed, but the taxpayers claim that they did not receive it within the time in which to timely petition. The taxpayers filed an untimely petition, with the Court dismissed. The Court of Appeals for the Ninth Circuit upheld the dismissal. The IRS also issued a notice of deficiency (NOD) that duplicated the adjustments in the FPAA and included additional adjustments. The taxpayer filed a timely petition with respect to the NOD. They moved for summary judgment asking that the Tax Court determine that it had jurisdiction over all the items in the NOD, including those they were included in the previously issued FPAA. The Tax Court held the partnership items did not convert to nonpartnership items under Sec. 6223(e)(3) because the partnership proceeding was ongoing at the time the IRS mailed the FPAA. The Court also held the partnership items did not convert to nonpartnership items under Sec. 6223(e)(3) because filing a petition with respect to an NOD is not substantial compliance with procedures for opting out of a TEFRA proceeding. The Court held further that the IRS did not reasonably determine under Sec. 6231(g)(2) that TEFRA did not apply to the partnership and that the Court was bound by The Court of Appeals for the Ninth Circuit's prior holding that the Court lacked jurisdiction over the partnership items in the NOD.

Tip of the Day

Business and personal assets when borrowing . . . When it comes to borrowing money for a smaller business, the bank is almost assuredly going to look at your personal finances as well as those of the business. More than likely, for any significant loan you'll have to co-sign, and pledge your personal assets as collateral. Whether or not that's the case will often depend on the assets of your business (i.e., can they be used as collateral) as well as how risky the lender perceives your business. The bank may also look at your personal debt and the amount of equity in your home.


August 18, 2014


Revenue Procedure 2014-48 (IRB 2014-36) provides the exclusive procedures by which a taxpayer obtains the consent of the IRS under Sec. 446(e) to change a method of accounting to comply with final regulations (TD 9688) under Sec. 1.471-8 on the retail inventory method of accounting. The final regulations clarify the computation of ending inventory values under the retail inventory method and provide alternative methods for taxpayers using the retail lower of cost or market method of accounting to account for margin protection payments. The final regulations and the revenue procedure apply for taxable years beginning after December 31, 2014.

In RERI Holdings I, LLC et al. (143 T.C. No. 3) LLC1 contributed a successor member interest in a second LLC (LLC2) to a university. The IRS moved for partial summary judgment that (1) the actuarial tables under Sec. 7520 do not apply to value the successor member interest and (2) the TMP (tax matters partner) failed to substantiate the value of the successor member interest with a qualified appraisal as defined in Reg. Sec. 1.170A-13(c)(3). The Tax Court followed Pierre (133 T.C. 24); LLC2 a disregarded entity, is not disregarded in determining value of the successor member interest in LLC2 that LLC1 contributed to the university. The Court held Estate of Gribauskas (116 T.C. 142) distinguished on ground that successor member interest involved right to receive a capital asset in the future and not a stream of fixed payments. Finally, the Court denied the IRS's motion.

Tip of the Day

Passive losses and recordkeeping . . . If you've got carryforward passive losses from rental properties it could be years before the losses are utilized. You should keep records on how the losses were generated (receipts for expenses, capital expenditures, etc.) for at least three years after they're utilized.


August 15, 2014


Notice 2014-47 (IRB 2014-36) provides guidance for the 2014 fee year on how the IRS will administer the definition of a “covered entity” for purposes of the health insurance fee under § 9010 of the Affordable Care Act. The notice applies only to the 2014 fee year.

The IRS has updated Publication 1, Your Rights as a Taxpayer and has made it available in Spanish, Chinese, Korean, Russian and Vietnamese as well as English.

When an appraisal is involved, disputes with the IRS are common. That was the case in Leroy S. Schmidt et ux. (T.C. Memo. 2014-159) where the taxpayer donated a conservation easement on land. The Tax Court determined the value and found it to be lower than that claimed by the taxpayer, but not as low as the value the IRS put on it. Both the taxpayer and the IRS used the "before and after value", but they could not agree on comparable properties. The Court did not find either expert's report with respect to the finished lot selling prices to be complete and convincing. The Court also failed to agree with the time it would take to develop and sell the lots. The Court also applied a discount rate of 22% to the fact that development and sale would take time. The 22% included a 10% entrepreneurial profit factor. The Court did not find either the substantial misstatement penalty or the accuracy-related penalty appropriate.

Tip of the Day

W-2 special due dates . . . W-2s must normally be sent to employees by the last day of January. However, they may be due earlier in two special cases. First, if you're terminating your business you must provide the W-2 to your employees for the calendar year of termination by the due date of your final Form 941, 944, or 941-SS. Special rules may apply in several cases. Second, if an employee terminates (but your business continues to operate) you must provide a W-2 if an employee requests one within 30 days of the request or within 30 days of the final wage payment, whichever is later. For more information, see the instructions for Form W-2.


August 14, 2014


While tax exempt organizations usually don't pay income tax on their income, they are generally responsible for all payroll taxes. The Treasury Inspector General for Tax Administration (TIGTA) did a study and found that more than 64,200 (3.8%) of the organizations had nearly $875 million of Federal tax debt. Most owed minor amounts, but some 1,200 owed more than $100,000 each. Unpaid taxes were often associated with multiple tax periods. The worst offenders identified in the audit received Medicare, Medicaid and government grants while not remitting payroll and other taxes. To see the full report go to

The IRS and the Treasury Inspector General for Tax Administration continue to hear from taxpayers who have received unsolicited calls from individuals demanding payment while fraudulently claiming to be from the IRS. Based on the 90,000 complaints that TIGTA has received through its telephone hotline, to date, TIGTA has identified approximately 1,100 victims who have lost an estimated $5 million from these scams. The most important thing to keep in mind is that the IRS's first point of contact is a letter. To see the full text of the news release, see IR-2014-81.

Passive activity losses can't be used to offset other income, just passive income. There's a limited exception for rental real estate losses. In Scott Wesley Williams et ux. (T.C. Memo. 2014-158) the taxpayer owned an airplane for personal use, but also rented it to flight schools and used it in his other business. The taxpayer thought he could show he materially participated in the activity by meeting the 100 hours test. He took pains to insure that no one worked on the plane more than he did. The Court found the taxpayer did not show that he materially participated in the activity. The Court examined his documentation and found it not sufficient. The Court touched on the question of whether the activity was per se passive. The taxpayer argued that the rental periods were seven days or less, taking the activity out of the per se passive classification. The Court did not address the question because it was moot after finding the taxpayer did not show material participation. Finally, the Court also examined whether the airplane rental could be grouped with the taxpayer's primary business activity. If it could, the aircraft rental losses could offset the business income of that activity. The Court looked at the five factors and could find no commonality save the taxpayer.

Tip of the Day

Check your references . . . Yes, your references. Make sure that the reference you're giving to a potential customer one who will recommend you. We've know of more than one case where a tradesman or professional gave out a name as a reference that actually provided a negative report. That's almost sure to turn the potential customer.


August 13, 2014


Deductions for meals and entertainment, travel away from home, and local transportation require a higher level of substantiation than most other expenses. Generally, for these expenses the taxpayer must show the amount, time and place and business purpose of the expense and the business relationship to the taxpayer of any person entertained (if the expense is for meals or entertainment). In Marcus Octavious Crawford (T.C. Memo. 2014-156) the taxpayer sold nutrional supplements and as sideline and reported the income and expenses on Schedule C. He offered his daily calendar as evidence of the business purpose and location of his travel. The entries in the calendar contain notations related to his activities for the day. Some indicated a location such as "Hendersonville", some a person's name such as "Charles", while some indicated an activity. Some of the days are annoated with numbers for miles. On a spreadsheet the taxpayer listed the name of the store or restaurant where the expense was incurred, the date, the amount, and the business purpose. The business purpose for every entry was the same, "interview/team training". The IRS objected to the admission of the calendar. But the Court indicated that even if the calendar and the spreadsheet were admitted the two documents in combination with the documentary evidence and testimony do not demonstrate that the taxpayer was entitled to any of the disputed deductions. The Court found the locational notations on the calendar were unreliable since in several instances a receipt showed the taxpayer in another location. The Court also found the notations on the calendar too vague or too ambiguous to determine if the mileage entries were related to the taxpayer's Schedule C business or the taxpayer's regular job or personal errands. The Court sided with the IRS in disallowing the full $20,149 of car expenses, $2,981 of the $3,478 of his travel expenses, and $4,629 of his $4,653 meal and entertainment expenses.

There's a time limit on the filing of a refund claim. The limit starts running on the later of the due date of the return or when the return was filed. In Maria Esther Montiel (U.S. Court of Federal Claims) the taxpayer filed a Form 1040, even though she claimed to be a nonresident alien. The IRS admitted she was a Mexican citizen and resident and that the Form 1040NR she should have filed was due June 15. The IRS argued that the statute of limitations started to run on April 15, arguing by filing Form 1040 she claimed to be a resident alien. The Court didn't agree finding the statute started to run on June 15 and her refund claim was timely filed.

Tip of the Day

Stay focused . . . Life in general is more complicated than ever. Business is even more so. Computers have made things easier, but also made things more complex, as have government regulations, business contracts, etc. The trick is to know how deep you need to be involved in certain issues. You need to know the general concepts and some of the implications, but it's unlikely you'll be directly involved in preparing your financial statements, major contracts, etc. Don't get involved in the details. And don't let employees bog you down in minutia. Know when to cut off discussions in meetings, politely say you're needed elsewhere, etc. Many small business owners lose control because they fail to give up control.


August 12, 2014


Rev. Proc. 2014-47 (IRB 2014-35) provides guidance for entering into a withholding foreign partnership agreement and a withholding foreign trust agreement with the IRS under Sec. 1.1441-5(c)(2)(ii) and (e)(5)(v).

The American Taxpayer Relief Act of 2012 provides for a beginning of construction requirement for a taxpayer to receive the renewable electricity production tax credit (PTC) under Section 45, or the energy investment tax credit (ITC) under Section 48 in lieu of the PTC, with respect to such a facility if construction began before January 1, 2014. Notice 2013-29 provides two methods to determine when construction has begun--a physical work test and a 5 percent safe harbor. Notice 2013-60 clarifies Notice 2013-29. Notice 2014-46 (IRB 2014-35) further clarifies Notices 2013-29 and 2013-60 regarding (1) how to satisfy the physical work test and (2) the effect of various types of transfers with respect to a facility after construction has begun. In addition, this notice modifies the application of the 5 percent safe harbor.

Valuation of a closely held business is frequently an issue on estate tax returns. In Estate of Franklin Z. Adell (T.C. Memo. 2014-155) the estate submitted an estate return using an income approach to value the business. Some time later the estate filed two amended returns, reporting lower valuations for the business based on a different valuation approach. The IRS determined that the value of the business was several times more than the valuation reported by the estate on the original return. The Tax Court found the value originally reported by the estate to be the appropriate value. The Court noted the importance of a major customer and the fact that the customer could terminate the agreement and a key employee's goodwill were taken into account in the valuation.

Know where your trucks (or cars) are . . . You can get an interactive program where you can see where your vehicles are in real time. But that generally means incurring a monthly fee in addition to the equipment cost. If all you want to do is find out when and where your vehicles have been, you may be able to buy a unit you can attach to the vehicle and remove to download the data to a map. The unit will show the route and time spent at locations. The cost could be well under $200. You might consider it before the more costly alternatives.


August 11, 2014


The IRS has issued final regulations (T.D. 9687) that provide comprehensive guidance for the award program authorized under Sec. 7623 (whistleblower). The regulations provide guidance on submitting information regarding underpayments of tax or violations of the internal revenue laws and filing claims for award as well as administrative proceedings applicable to claims for award under Sec. 7623.

You can't simply transfer the receipt of income to another party. For example, if your corporation contracts to do a job, the income belongs to the corporation, not you personally, even if you're the sole shareholder. If the income is generated by an asset (e.g., a oil and gas lease on property) transferring the lease to another entity for less than adequate consideration is also considered an assignment of income. In Salty Brine I, Limited, et al. (U.S. Court of Appeals, Fifth Circuit) the Court upheld a District Court case finding that the transfer of certain overriding royalty interests through a complicated transaction was an invalid attempt to assign income. The Court noted the transfer was between the partnership and the partners and the partners had complete control of the transaction. The Court found the transaction lacked economic substance and was engaged in to avoid income taxes.

Tip of the Day

End of cash accounting for taxes? . . . It's been talked about. But it probably won't happen. Almost half the members of the Senate have signed a letter discouraging the Senate finance committee from pursuing a mandate of accrual accounting for personal service corporations and farmers with more than $10 million in revenue. The important point is that the Senators are aware that requiring accrual accounting would make the tax laws even more complex for many businesses.


August 8, 2014


The Treasury Department has indicated it is looking at what it can do to slow the number of corporations engaging in tax inversions. While without Congressional action its options are limited, it's looking into a possibilities.

As a result of severe storms, tornadoes, straight-line winds and flooding from June 1 through the 4th, the president has declared certain areas of Nebraska eligible for disaster relief. Taxpayers in the counties of Burt, Butlert, Cass, Hamilton, Holt, Nemaha, Pawnee, Polk, Rock, Thurston, Valley and Washington who sustained losses may deduct them on their 2013 return.

As a result of severe storms, tornadoes, and flooding from June 13 through the June 20, the president has declared certain areas of South Dakota eligible for disaster relief. Taxpayers in the counties of Butte, Clay, Corson, Dewey, Hanson, Jerauld, Lincoln, Minnehaha, Perkins, Turner, Union, and Ziebach and the Standing Rock Sioux Tribe within Corson County who sustained losses may deduct them on their 2013 return.

Alimony or property settlement? Alimony is deductible by the payor; a property settlement amount isn't. In Joseph Peery and Dawn Shannon Chapel (T.C. Memo. 2014-151) the Court found that a payment made in the amount of $63,500 was a property settlement, not alimony. The amount was equal to a property settlement mandated by the court handling the divorce. The taxpayer could not show the amount was for alimony.

Tip of the Day

Trade association dues may not be fully deductible . . . Certain lobbying and political expenses are not tax deductible as an ordinary business expense. Many trade associations pay such expenses. They have to report how much, if any, of the dues a member pays goes toward those expenses. When filing your business return make sure you don't deduct that portion.


August 7, 2014


The IRS has released a revised Form 2848, Power of Attorney and Declaration of Representative. The new form does not allow for electronic filing and registered tax return preparers and unenrolled return preparers must provide a valid PTIN to represent a taxpayer before the IRS. You can download Form 2848 or the Instructions from the Updated Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer and the Instructions for Form 1023-EZ have recently been released.

The IRS has issued corrections to the final regulations (T.D. 9673) relating to the use of longevity annuity contracts in tax qualified defined contribution plans.

In Raymond E. Gardner et ux. (T.C. Memo. 2014-148) the IRS argued that the taxpayer's cattle breeding activity was not engaged in for profit. The Court noted the taxpayer did not substantiate the amount of time spent in the activity, he incurred substantial losses, did not use independent advisers, did not conduct the activity in a businesslike manner, among other issues. The Court also found that much of the expenses were financed with promissory notes and defaulted on most of the notes and that he never registered the cattle with a breed association. The Court found that the taxpayer did not engaged in the activity for profit, and, accordingly, the losses were not deductible.

Tip of the Day

Taking turns at meals . . . You can take an associate out to lunch, even a partner in your business, and deduct the tab (subject to the 50% rule). But you can't alternate--one day Fred takes you, the next day you take Fred. The issue has come up in several court cases. There's no time frame or number; it depends on the facts and circumstances. The IRS may be looking for a pattern, for frequent meals, etc. While meals are most often involved, the same would apply to entertainment.


August 6, 2014


What does it take to have a criminal tax conviction for a false tax return? In Richard C. Mathews (U.S. Court of Appeals, Eighth Circuit) the taxpayer consistently underreported his income--bank records showed gross receipts of some $67,000, $39,000, $57,000, $27,000 and $54,000 for the years at issue while the taxpayer reported $3,560, $3,318, $0, $ 5,323, and $10,000. When his home was searched he claimed he had only $20 in his wallet, but the IRS found $3,000 in one safe and $10,000 in another. The Court noted that intent may be inferred from conduct, and willfulness in a criminal tax case may be established by a consistent pattern of not reporting income or inconsistently reporting income. The Court noted that the income he reported was a fraction of the true amount. The Court also noted that his willfulness was established by his repeated efforts to conceal information about his business operations and checking accounts. The Court of Appeals affirmed the District Court's judgment and sentence.

Tip of the Day

Know your strength and protect it . . . Most successful businesses have a particular strength. For some it's consistently low price; for some it's quality merchandise or service; some rely on technical prowess; others claim a broad selection of products. There are other edges. You may have more than one. But whatever it is, that's probably a large part of the reason your customers come to you. You want to protect and nurture it. You protect it by making sure you keep providing a quality service, stay up-to-date on technical issues, etc. You nurture it by making sure your employees are on the same page. If technical knowledge is important, encourage and pay for them to go to seminars and workshops. You generally can't change your strength without damaging your business. Outside forces may make you change, but If the model is working be very careful in how you do it.


August 5, 2014


The Senate has sent the Highway and Transportation Funding Act of 2014 to the president. The bill does not solve the long-term problem but avoids a funding shutdown of construction for a little less than one year by providing funding through May 2015.

A bill has been introduced in the Senate that would provide protection for taxpayers against fraudulent tax refund claims. The bill would provide assistance for victims of the crime and require several actions by the IRS including increasing electronic filing of returns, increased real-time filing, enhanced penalties for refund theft with stolen identities, and increased electronic filing of Forms 1099.

As a result of severe storms, straight-line winds, flooding, landslides, and mudslides from June 11 to July 11, 2014 the president has declared certain areas of Minnesota eligible for federal government assistance. Taxpayers in the counties of Chippewa, Freeborn, Jackson, Murray, Nobles, Pipestone, Renville and Rock may be able to deduct related losses on their 2013 federal income tax returns.

As a result of severe storms, tornadoes, straight-line winds and flooding during the period of June 14 through June 21, 2014, the president has declared certain areas of Nebraska eligible for federal government assistance. Taxpayers in the counties of Cedar, Cuming, Dakota, Dixon, Franklin, Furnas, Harlan, Kearney, Phelps, Stanton, Thurston, and Wayne may be able to deduct related loss on their 2013 federal income tax returns.

As a result of severe storms, tornadoes, straight-line winds and flooding during the period of June 14 through June 23, 2014, the president has declared certain areas of Iowa eligible for federal government assistance. Taxpayers in the counties of Allamakee, Buchanan, Buena Vista, Butler, Cherokee, Chickasaw, Clay, Dickinson, Emmet, Fayette, Franklin, Hancock, Humbolt, Ida, Kossuth, Lyon, Osceola, Palo Alto, Plymouth, Pochahontas, Sac, Sioux, Winnebago, Winneshiek, Woodbury, and Wright may be able to deduct related loss on their 2013 federal income tax returns.

Tip of the Day

Disability buy-sell . . . Your accountant, attorney, or other adviser probably has warned you that you should have a buy-sell agreement with your partners or shareholders. He or she probably suggested backing that up with insurance. But what would happen if you or one of your partners became disabled? That's a real possibility. The disabled person may or may not be able to act on his own behalf. Make sure that's part of any buy-sell agreement. You may also want to cover any buyout with disability insurance designed for that purpose. But the most important thing is to make sure the business can continue to function without the disabled partner. Consider both the possibility he or she won't be mentally capable of any action as well as mentally but not physically capable of performing his or her duties.


August 4, 2014


The president has determined that as a result of severe storms and flooding that began on May 13, 2014 certain areas of New York are eligible for federal assistance. Taxpayers in the counties of Allegany, Cattaraugus, Chautauqua, Delaware, Herkimer, Lewis, Livingston, Ontario, Otsego, Steuben, and Yates may be able to deduct their losses on their 2013 tax return.

As a result of severe storms, tornadoes, straight-line winds and flooding that began on June 3, 2014 in certain areas of Iowa, the president has determined these areas are eligible for federal assistance. Accordingly, taxpayers in the counties of Adams, Clarke, Decatur, Mills, Montgomery, Pottawattamie, Ringgold, Taylor, and Wayne may be able to deduct their losses on their 2013 tax return.

The IRS has announced that it’s important for individuals receiving advance payments of the premium tax credit to know that at this time, nothing has changed and tax credits remain available. Whether enrolled in coverage through a federally-run or state-run Health Insurance Exchange, also known as a Marketplace, individuals do not need to take any additional action or make any changes in response to the court rulings. The IRS will provide any updates on

Tip of the Day

React fast . . . One of the advantages of smaller businesses is the ability to react quickly to change. Don't lose that advantage. Whether it's the competition announcing a price cut, your competitor showcasing a new product, the discovery of a product defect, etc., virtually none of these are best dealt with by procrastination. While you may ultimately decide not to take action (e.g., matching a competitor's price cut), you should analyze the change and make an informed decision. Some problems, such as a product defect, when not handled quickly can snowball from a problem into a disaster. Newspapers and business publications are full of stories about problems that were ignored. Not sure what to do? Get advice from a professional in the field. And, longer term, consider a board of directors you can go to for advice.


August 1, 2014


The Bring Jobs Home Bill, which would deny certain tax breaks to companies that offshore jobs and provide benefits to those who bring jobs back failed to advance in the Senate when it failed to meet the 60-vote threshold.

The IRS has issued final regulations (T.D. 9686) relating to the assessment of penalties against material advisors who fail to timely file a true and complete return. The regulations implement amendments made by the American Jobs Creation Act of 2004. The regulations affect material advisors responsible for disclosing reportable transactions.

After the IRS assessed trust fund recovery penalties against him, the taxpayer requested a partial pay installment agreement. Before the taxpayer's request had been input into the IRS computer system or acted upon, the Service sent CP 90, Final NOtice-Notice of Intent to Levy and Notice of Your Right to a Hearing. The taxpayer timely requested a collection due process (CDP) hearing, renewing his request for an installment agreement and asserting that the Letters CP 90 should be withdrawn ass invalid pursuant to Sec. 6331(k)(2) which prohibits the IRS from making a levy while an offer for an installment agreement is pending. During the CDP hearing the IRS's settlement officer conditioned acceptance of an installment agreement on the taxpayer's making an $8,520 downpayment. The taxpayer declined this proposal as resulting in economic hardship. The IRS's final determination sustained the proposed levy on the ground that the taxpayer had declined the IRS's proposed installment agreement, it rejected the taxpayer's request that the Letters CP 90 be withdrawn as invalid. The Court held that Sec. 6331(k)(2) did not preclude the IRS from issuing the Letters CP 90 after the taxpayer submitted his offer for an installment agreement. The Court also held that the IRS's determination not to rescind the Letters CP 90 was not an abuse of discretion under relevant provisions of the Internal Revenue Manual and because the record did not allow for meaningful review of the IRS's determination regarding the appropriateness of the $8,520 downpayment as a condition of an installment agreement, the case was remanded for further proceedings. Renald Eichler, (143 T.C. No. 2)

Tip of the Day

Advance payments . . . Even if you're on the cash method you can't deduct certain advance payments. For example, you own a rental property and pay an insurance policy for more than a year in advance. For each year of coverage you can deduct the part of the premium payment that will apply to that year.


July 31, 2014


Announcement 2014-28 (IRB 2014-34) provides guidance to U.S. citizens or resident aliens living and working abroad whose tax home is in a foreign country and meet either the bona fide residence test or the physical presence test, choosing to exclude from their income a limited amount of their foreign earned income ($99,200 for 2014). Both the bona fide residence test and the physical presence test contain minimum time requirements. The minimum time requirements can be waived, however, for those who must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. Rev. Proc. 2014-25 contains the list of countries for tax year 2013 for which the minimum time requirements are waived. However, that list is incomplete. South Sudan and its departure date have been added.

The Senate has passed the Highway and Transportation Funding Bill by a 79 to 18 vote, but House Speaker John Boehner has indicated the bill will not get through the House if it contains tax provisions.

Democrats have introduced a No Federal Contracts for Corporate Deserters Bill. The measure would not allow federal contracts to be let to businesses that incorporate outside the U.S. The bill seeks to put a stop to corporate inversions.

An audit by TIGTA (Treasury Inspector General for Tax Administration) found the IRS eliminated or reduced tax return preparation, tax law assistance, refund inquiries, and transcript request services. However, prior to developing this plan, the Service did not evaluate the burden each service change would have on taxpayers who visit Taxpayer Assistance Centers. In addition, the IRS has not established processes to identify optimal locations to provide face-to-face services or to identify underserved areas that would benefit from virtual service. The complete report is at

Tip of the Day

Accounting methods and separate businesses . . . While your choice of accounting methods may be interesting only to a tax accountant, it can have implications on the complexity of your accounting, cash flow, etc. In recent Chief Counsel Advice (201430013) the Service held that a former subsidiary of a corporation that became an LLC with the corporation as its sole member was a separate and distinct trade or business from the corporation within the meaning of Sec. 446(d). The LLC did not elect to be taxed as a corporation and kept separate books and records, was in a different geographical location from the corporation, and the two did not share employees except for the highest level executives.


July 30, 2014


In a study the Office of the Director of National Intelligence found that about 83,000 DOD employees and contractors who held or were determined eligible for secret, top secret, or SCI clearances had unpaid federal tax debt totaling more than $730 million as of June 30, 2012. The median debt amount owed was $2,700, and tax debts ranged from a minimum of about $100 to millions of dollars. About 40 percent of the individuals were in a repayment plan with the IRS and about half of the individuals with tax debt were federal employees.

The tax law denies a deduction for any fine or similar penalty paid to a government for the violation of any law. Government includes a corporation or other entity serving as an agency or instrumentality of a domestic or foreign government. In 2008 Guardian Industries Corp. (143 T.C. No. 1) paid a fine to the Commission of the European Community (Commission) for participating in a price-fixing cartel that violated the competition provisions of EC law. The taxpayer claimed a deduction for the payment on its federal income tax return. The IRS claimed the Commission is an instrumentality of the government of a foreign country. The Tax Court held that "government of a foreign country" may refer both to the government of a single foreign country and to the governments of two or more foreign countries. The Court also held the Commission is an entity serving as an instrumentality of the EC member states. The Court disallowed a deduction for the fine.

Tip of the Day

Got references? . . . For some businesses references may be unimportant or even superfluous. But for most they're important and for some essential. A contractor can advertise, but a good reference can easily top many dollars spent on advertising. If references are important in your business be sure to cultivate them in your customers, clients, etc. And you should have a couple of names you can drop if asked for references (get their permission first). In some cases, such as selling in a small market, you might even incorporate them right in your advertising.


July 29, 2014


The House has passed, by a 237 to 173 vote, the Child Tax Credit Improvement Bill of 2014. The bill would increased the child tax credit phase-out threshold for married couples from $110,000 to $150,000 ($75,000 for those filing married, separate) and index the credit for inflation. The bill may not see law as President Obama has threatened to veto it.

The IRS has issued draft of a number of health care forms including:

You can download any of these forms by going to

Tip of the Day

Buying a business? . . . Or buying into a business? Chances are you'll check out the fixed assets, inventory, receivables, etc. If there are contracts in process, you want to check them carefully. You may end up committing to a job that could generate losses, or worse, subject you to a liability for cleaning up a site, etc. The seller may be walking away with the profits and leave you the liabilities. It's not that unusual for a seller to get out of a really bad contract by selling a business. That not only affects the value of the business (i.e., you overpaid), but it could mean a significant cash outlay you're not prepared for. Check with an accountant who has industry experience.


July 28, 2014


The IRS has announced that during the week of July 28, the IRS Return Preparer Office will be mailing letters to approximately 5,000 return preparers who are preparing tax returns without valid preparer tax identification numbers (PTIN). Letters will be sent to preparers who are using legacy PTINs obtained prior to September 2010 and never renewed in the new online PTIN system, those who are using Social Security numbers instead of PTINs and those who are using expired PTINs.

The IRS has issued final (T.D. 9683) and temporary (REG-104579-13) regulations relating to the health insurance premium tax credit (Sec. 36B). These regulations affect individuals who enroll in qualified health plans through Affordable Insurance Exchanges and claim the premium tax credit, and Exchanges that make qualified health plans available to individuals. The regulations also provide guidance concerning circumstances in which a married taxpayer may claim a premium tax credit on a separate return.

Tip of the Day

Refinancing a rental property? . . . If you refinance for the same amount as the remaining balance on the old loan, all the interest on the new loan is fully deductible. Things get more complicated if the amount of the refinancing is more than the balance on the old loan. Interest on the additional amount borrowed is not deductible unless the additional amount taken down is used for finance expenditures on the property or the additional principal is used for other purposes where the interest would be deducible. For example, you have a rental property with a mortgage balance of $200,000. You refinance taking down a loan of $250,000. You use the $50,000 for a new car. Only 80% of the interest (200/250) is deductible. Assume the same facts but you use the $50,000 for capital improvements to the property. All the interest on the new loan would be deductible.


July 25, 2014


Revenue Procedure 2014-46 (IRB 2014-33) provides the 2014 monthly national average premium for qualified health plans that have a bronze level of coverage for taxpayers to use in determining their maximum individual shared responsibility payment under Sec. 5000A(c)(1)(B) and Reg. Sec. 1.5000A-4. This revenue procedure also provides an explanation of the methodology used to determine the monthly national average premium amount.

Revenue Procedure 2014-37 (IRB 2014-33) provides the methodology to determine the applicable percentage table in Sec. 36B(b)(3)(A) used to calculate an individual’s premium assistance credit amount for taxable years beginning after calendar year 2014. It also provides the methodology to determine the required contribution percentage in Sec. 36B(c)(2)(C)(i)(II) used to determine whether an individual is eligible for affordable employer-sponsored minimum essential coverage for purposes of Sec. 36B for plan years beginning after calendar year 2014. Additionally, Revenue Procedure 2014-37 reproduces the required contribution percentage, as determined under guidance issued by the Department of Health and Human Services, used to determine whether an individual is eligible for an exemption from the individual shared responsibility payment because of a lack of affordable minimum essential coverage under Sec. 5000A(e)(1)(A) for plan years beginning after calendar year 2014.

Revenue Procedure 2014-41 (IRB 2014-33) provides calculation methods a taxpayer may use to resolve the interrelationship between the Section 162(l) deduction and the premium tax credit under Section 36B. It provides an iterative calculation and alternative calculation taxpayers may use, as well as examples demonstrating the calculations.

Notice 2014-42 (IRB 2014-33) provides procedural guidance relating to the annual fee imposed on branded prescription drug manufacturers and importers under Sec. 9008 of the ACA.

The IRS has announced that it has no plans to delay premium subsidies under PPACA (Patient Protection and Affordable Care Act) as a result of the opposing decisions in the D.C. and Fourth Circuit courts.

Tip of the Day

Moving expenses . . . If you move to be closer to a new job you may be able to deduct the expenses of moving household goods and personal effects and traveling to your new home. The cost of traveling includes lodging (but not meals) and air or train fare or driving your own car. You have to meet certain tests including a distance test (the new job must be at least 50 miles more from your old home than your former job was) and a time test. The time test is satisfied if the move is closely related to the start of work (in most cases the moving expenses must be incurred within 1 year from the date you first reported to work at the new location) and you must work at the new location for 39 weeks or 78 weeks if you're self-employed. There are exceptions to the rules and there are a number of circumstances where things can get more complicated. There's more data in IRS Publication 521.


July 24, 2014


The IRS has issued final regulations (T.D. 9682) relating to basis of indebtedness of S corporations and their shareholders. These final regulations provide that S corporation shareholders increase their basis of indebtedness of the S corporation to the shareholder only if the indebtedness is bona fide, which is determined under general Federal tax principles and depends upon all the facts and circumstances.

The Work Opportunity Tax Credit (WOTC) is a Federal tax credit designed to encourage employers to hire individuals from certain targeted groups who have consistently faced significant barriers to employment. For Tax Year 2013, the maximum credit per individual that could be claimed was $9,600. The credit has been in existence since 1978 but expired on December 31, 2013. The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether controls were adequate to identify questionable employer claims for the WOTC. Between January 1 and December 30, 2012, more than $721 million in the WOTC was claimed on 21,278 electronically filed tax returns. The number and amount claimed on paper returns is not available. TIGTA found the IRS did not establish processes to verify the eligibility for the WOTC. TIGTA identified 759 WOTC claims totaling approximately $13 million on 687 tax returns processed in Processing Year 2012 for which the IRS had information at the time the tax returns were processed that could have been used to identify these claims as questionable. The IRS reviewed 77 of the 759 WOTC claims to determine whether the WOTC was in fact potentially erroneous. The IRS confirmed that 24 of the 77 were erroneous WOTC claims. The remaining 53 WOTC claims involved mistakes on the part of the filer or the pass-through entity. For the complete report go to

The law provides a premium credit to individuals who purchase health insurance through one of the exchanges if their household income is between 100 and 400 percent of the federal poverty line. The wording in the law seems to indicate that only insurance purchases made on state exchanges, not the federal exchange, qualify for the credit. Thus, individuals in states without an exchange (most of the states) would not be entitled to the credit. In recent cases, Halbig v Burwell, D.C. Circuit and King v Burwell, Fourth Circuit two U.S. Court of Appeals for different circuits have reached different conclusions. In one case individuals who signed with the federal exchange would get the credits; in the other they wouldn't.

Tip of the Day

Don't oversell . . . Recognize that some prospects are just not going to buy. There can be any number of reasons--from no money to their brother-in-law is in the business. The latter is virtually impossible to overcome. Even if Fred doesn't like his brother-in-law, he doesn't want to get his wife mad at him. There's a fine line between wearing down a good prospect to get him to commit and wasting your time and irritating the prospect.


July 23, 2014


There seems to be an impetus in Congress for dealing with the corporate inversions (where corporations move overseas) by plugging the loophole and reducing the corporate tax rate.

The only deductions you can take for your personal residence are mortgage interest and real estate taxes. You can deduct relevant expenses for a property that's rented during the year and not used for personal purposes. There's a third variation--where you use the property for personal purposes for 14 days or more or 10% or more of the time the property is rented at a fair rental value. In Douglas D. Schumann (T.C. Memo. 2014-138) the taxpayer had two apartments aboard a cruise ship. The IRS disallowed the deductions for one because the taxpayer used it at least 162 days during the year at issue and was not rented. The second apartment was donated as a live auction item for charity. The IRS disallowed deductions for the second apartment because it too was never rented at a fair rental value during the year and thus used for personal purposes. The Tax Court sided with the IRS on both issued and disallowed the deductions. The Tax Court also found the taxpayer was not a real estate professional with respect to other properties that he did rent because he did not show he materially participated.

Tip of the Day

Make your offer upfront . . . If you're making an offer--20% off, free shipping, buy one-get one free--put the offer as early in your ad as you possible. Many prospects are no longer taking the time to read through a long ad, multi-page direct mail piece, etc. If the offer is a good one, it should grab their attention.


Copyright 2014 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

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