Small Business Taxes & Management

News and Tip of the Day


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

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September 23, 2014

News

The IRS has reported the release of a chart detailing the Retirement Plan Reporting and Disclosure Requirements for IRS and Department of Labor purposes.

In Greenoak Holdings Limited, Southbrook Properties Limited and Westlyn Properties Limited (143 T.C. No. 8) an estate had unpaid taxes. The IRS issued a final notice of intent to levy to the estate to collect the unpaid estate tax. The estate request a hearing before the IRS Appeals officer (AO) pursuant to Sec. 6330. Following the hearing, the AO issued a notice of determination to the estate sustaining the proposed levy as to the estate's nonprobate assets. Among the nonprobate assets reported on the estate tax return was an offshore trust that owned certain entities (the petitioners). The petitioners petitioned the Tax Court for review of the notice of determination issued to the estate. No petition was filed on behalf of the estate. The petitioners sought to intervene. The Court noted the law states that no levy may be made on any property or right to property of any "person" unless the IRS has notified such person in writing of their right to a hearing. The Court noted the petitioners interpreted "person" broadly so as to include any third party claiming an ownership right in property that might be subject to levy to collect the unpaid taxes of another person. The Court held that "person" entitled to the rights and protections in Sec. 6330 is the taxpayer liable for unpaid Federal tax. The Court further held that it lacked jurisdiction over a petition filed by a party who is neither the taxpayer nor an authorized representative of the taxpayer.

Tip of the Day

Buying a rental property? . . . There are still properties available that can produce a good return over time, but with prices up finding the right one is not as easy as it was a couple of years ago. And keep in mind that real estate is illiquid. While you may be able to borrow on the property (if you have enough equity), selling can take some time. That's true in virtually all but "hot" markets. In some cases a property can be on the market for several years. And you may need money for emergency repairs. A new furnace could be $7,500; a septic system $10,000 plus. If you're going into real estate for the first time, make sure you have enough liquid assets to handle contingencies. Discuss the financial and tax implications with your CPA or financial advisor.

 

September 22, 2014

News

CCH and RIA have announced their estimates of the tax brackets, phaseouts, IRA contribution limits, etc. for 2015 based on the increase in the Consumer Price Index for All Urban Consumers for the year ended August 31, 2014. The increase in the CPI was 1.58%. That's basically reflected in an increase in the brackets and phaseouts (rounded). The limit for contributions to IRAs remains unchanged at $5,500 ($6,500). The official IRS numbers will be released in a little over a month.

Notice 2014-57 (IRB 2014-41) announces the special per diem rates effective October 1, 2014, which taxpayers may use to substantiate the amount of expenses for lodging, meals, and incidental expenses when traveling away from home. The rates are the special transportation industry rate, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. Use of a per diem substantiation method is not mandatory. A taxpayer may substantiate actual allowable expenses if the taxpayer maintains adequate records or other sufficient evidence for proper substantiation.

In Steven Yari (143 T.C. No. 7) the IRS assessed a penalty under Sec. 6707A (penalty for failure to include reportable transaction information with return). The taxpayer requested a collection due process hearing, challenging the collection action. While the hearing was pending, Congress retroactively changed the manner in which the penalties are calculated. The taxpayer requested that the IRS recalculate the penalty using the amount of tax shown on subsequent amended returns. The IRS declined to do so. The taxpayer believed the penalty calculation should use the actual tax due, not the tax shown on the return on which he was obliged but failed to disclose the reported transaction. The Court held that it had jurisdiction and that the penalty is calculated by reference to the amount shown on the return with respect to which the taxpayer had a disclosure obligation.

Many lawsuit settlement proceeds are taxable income. In Garey A. Cosentino et ux. (T.C. Memo. 186) the taxpayers, on the advice of their accounting firm entered into an abusive tax shelter that involved the sale of a property. Had the taxpayers not followed the advice they would have transacted a like-kind exchanged and deferred taxes on the sale, as they had done in the past. However, because the shelter transaction caused them to pay taxes, they sued the accounting firm for damages. The IRS argued that the entire amount of the settlement was income. The Court found that the settlement amount was, in part, a replacement of the capital lost. Based on the tax benefit rule, a portion of the settlement was taxable income.

Tip of the Day

Keep blank bank statements . . . If you've got a business, rental property, or other source of income other than a regular job, you've got to keep both your business and personal bank statements, even if they're blank. Why? The IRS could argue that you might have deposited $5,000 in April and withdrawn a like amount in May and all the other statements for the year were blank. So you'll need the statements for every account for every month. That could include a companion savings account that carries a minimum or static balance just to get a lower rate on your checking account. While you need a bank account for every business, generally you shouldn't maintain an account that's never used. And don't assume you'll be able to download statements forever for free. Many banks and other vendors (e.g., telephone, electric, etc.) who don't give you a hard copy only allow free downloading for a limited period of time. Sometimes that's as little as 18 months. Best advice? Download the statements regularly.

 

September 19, 2014

News

Revenue Procedure 2014-54 (IRB 2014-41) modifies the procedures in Rev. Proc. 2011-14 and Rev. Proc. 2014-17, regarding certain changes in method of accounting for dispositions of tangible depreciable property. This revenue procedure provides the procedures by which a taxpayer may obtain the automatic consent of the Commissioner of Internal Revenue to change to the methods of accounting provided in Secs. 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8 of the Income Tax Regulations. This revenue procedure also allows a late partial disposition election under Sec. 1.168(i)-8 to be treated as a change in method of accounting for a limited period of time. Finally, this revenue procedure also modifies section 10.11 of the APPENDIX of Rev. Proc. 2011-14 regarding a change to the method of accounting described in Rev. Proc. 2014-16 for amounts paid to acquire, produce, or improve tangible property.

Notice 2014-49 (IRB 2014-40) describes a proposed approach to the application of the look-back measurement method, which may be used to determine if an employee is a full-time employee for purposes of Sec. 4980H in situations in which the measurement period applicable to an employee changes. This notice is intended to address the topics for which guidance was anticipated in section VII.G of the preamble to the final Sec. 4980H regulations (Feb. 12, 2014).

Notice 2014-55 (IRB 2014-41) expands the permitted election rules for health coverage under a Sec. 125 cafeteria plan and addresses two specific situations in which a Sec. 125 cafeteria plan participant is permitted to revoke his or her election under the Sec. 125 cafeteria plan during a period of coverage. The first situation involves a participating employee whose hours of service are reduced so that the employee is expected to average less than 30 hours of service per week but for whom the reduction does not affect the eligibility for coverage under the employer’s group health plan. The second situation involves an employee participating in an employer’s group health plan who would like to cease coverage under the group health plan and purchase coverage through a competitive marketplace established under section 1311 of the Patient Protection and Affordable Care Act, commonly referred to as an Exchange or Marketplace.

Notice 2014-56 (IRB 2014-41) provides the applicable dollar amount that applies for determining the PCORI fee for policy years and plan years ending on or after October 1, 2014 and before September 30, 2015.

Tip of the Day

Rental income? . . . Generally, if a lessee pays any of the expenses of his lessor such payments are additional rental income of the lessor. If a lessee places improvements on real estate which constitute part or all of a substitute for rent, the improvements are rental income to the lessor. Whether or not improvements made by a lessee result in rental income to the lessor in any particular case depends upon the intention of the parties. Best advice? Spell it out in the lease to avoid and issue should you be audited.

 

September 18, 2014

News

If you're using the cash method of accounting you can generally deduct the an expense in the year you write the check. In Vanney Associates, Inc. (T.C. Memo. 2014-184) the taxpayer wrote a bonus check to its president and sole shareholder at the end of the year knowing that there were insufficient funds to fully pay the check. The president endorsed the check in his own name and made it payable to Vanney Associates. The payment was recorded on the books as a loan from the shareholder and the corporation repaid the loan in March of the following year. The Court disallowed the deduction for a bonus because it was a conditional payment and the deduction depended on payment of the check, which was not done.

Tip of the Day

Try a rehearsal . . . Too often we spend time trying to get everything right by analyzing the situation only to find when we hit the real thing there's something we forgot. Try a run-through before the actual event. Going to a complex closing on a property or business? Have assistants from both sides get together before the actual closing to run through all the papers. We've seen situations where the parties are ready to sign and a minor document isn't available or a step hasn't been taken. It's embarrassing and costly. Opening a new store, restaurant, etc.? You probably want the press and as many people as possible. You don't want to be embarrassed by something that could have been taken care of ahead of time if you had a "soft opening".

 

September 17, 2014

News

Senate Finance Committee Chairman Ron Wyden, D-Ore., has just called for lawmakers to take action on the tax provisions that expired at the end of last year. Wyden cited the fact that the higher limits of Sec. 179, the provision that allows a certain dollar of asset purchases to be expensed, hasn't been renewed is causing problems for smaller businesses.

The IRS has issued final regulations (T.D. 9692) under Sec. 3402(p) relating to voluntary withholding agreements. The final regulations allow the IRS to issue guidance in the Internal Revenue Bulletin to describe payments for which the IRS finds that income tax withholding under a voluntary withholding agreement would be appropriate.

The IRS has announced (IR-2014-91) the release of a YouTube video encouraging taxpayers to learn about the Taxpayer Bill of Rights. The video lays out in plan language 10 fundamental rights included in the tax code.

Section 6501(c)(4)(B), requires that the IRS provide notice to taxpayers of their rights to decline to extend the assessment statute of limitations or to request that any extension be limited to a specific period of time or specific issues. In a review of a statistical sample of 59 closed taxpayer audit files with assessment statute extensions the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS is generally compliant with Section 6501(c)(4)(B). However, TIGTA identified a few instances in which the taxpayer audit files did not contain documentation to support that the taxpayer or the taxpayer’s representative were properly notified of the taxpayer’s rights.

Tip of the Day

Work-related education expenses . . . You may be able to deduct tuition, books, supplies, transportation, and related expenses for education to improve or maintain your job skills. But you can't deduct expenses that will qualify you for a new trade or business. If you're self-employed deduct the expenses on Schedule C; if you're an employee you deduct the expenses as a miscellaneous itemized deduction on Schedule A. What qualifies an individual for a new trade or business can be tricky. If the profession requires a license, such as a CPA, attorney, pilot, or even a licensed plumber, coursework and tests would generally not be deductible. On the other hand, a pilot who has a commercial license to fly charters in a piston aircraft might be able to deduct the cost of training in jet aircraft. Reimbursed by your employer? You can only deduct costs in excess of the reimbursement. And you can't deduct education expenses as a business expense on Schedule A or C and get a benefit for the same expenses under one of the education benefits (education credit or tuition and fees deduction).

 

September 16, 2014

News

If a business fails to make its employment tax deposits the IRS can go after not only the business but any responsible individual. The trust fund liability is not limited to partners, shareholders, officers, etc. but anyone who can control the disbursement of funds. Thus, a bookkeeper who can decide which creditors to pay and can sign checks could be held responsible. In Charlotte K. Webb-Smith et al. (U.S. District Court, Eastern Dist. North Carolina, East. Div.) the Court found the individual, despite being a corporate officer and a preparer and signer of checks, was told by the sole shareholder which creditors to pay and the priority of payments. She was not involved in day-to-day management. Furthermore she did not have access to the checkbook except at the discretion of the sole-shareholder. The Court found the individual not a responsible person.

Tip of the Day

Test first . . . Before committing big dollars to a new product, service, ad campaign, marketing approach, etc. do some testing. The business landscape is littered with companies, products, etc. that made mistakes or misjudgments on products or markets. We know of one company that had three software packages aimed at three different areas of the same market. The first two were huge winners. The third one was an also-ran. The first two served a real need; the third one wasn't really needed by the market. Customers could easily do the same calculations with a spreadsheet. The third product accounted for only 10% of sales by number of units, despite the fact it was priced at only 60% of the other two. Fortunately, the cost to develop and market the product was a fraction of the other two. The more costly or critical the project, the more important testing becomes. It's vital if you're going to change the look and feel of the company or a major product.

 

September 15, 2014

News

Worried about the cash method of accounting becoming extinct? Based upon the response of both the House and Senate, it seems unlikely. Some 233 Representatives and 46 Senators have signed a letter (different versions in the House and Senate) stating their objections to the accounting change. The AICPA has also voiced its opposition to any change in the cash method.

In Nachama Hirsch (U.S. District Court, Eastern Dist. New York) the Court held that the IRS could not reduce to judgment the taxpayer's joint tax liability. The taxpayer had sought innocent spouse relief and the Court found the IRS did not properly notify the taxpayer her request was denied. In addition, there was a question as to the taxpayer's last-known address and the mailing of a determination notice.

Tip of the Day

Your will only a first step . . . Your will is certainly a critical first step. Without one your heirs are in for a costly and protracted struggle. But, for many individuals, a will is only a beginning. You should have a list of insurance policies, brokerage firms and banks holding your accounts, account numbers and information such as the beneficiary and whether or not the account is a transfer on death or not. Own stocks in your own name? Or never put them in your name after your spouse died? That can complicate sales. So can stocks that have merged, spun off companies, etc. where you haven't updated the shares. Got stock in Madison Inc., that small business your buddy started some years ago? Your executor may find it difficult to track it down. Your executor is probably obligated to inform potential heirs such as your nephew, etc. (named in the will or not) of your death and that the will is to be probated. You may know where Fred lives (he's off the grid in Maine) but since you haven't talked about him in 20 years your daughter might not have a clue. And don't forget about the passwords to your on-line accounts, that credit card you haven't used in two years, the bank account you opened when you lived in South Dakota for a year, safety deposit boxes, a personal safe, etc. And you should have a list of your outstanding debtors as well. They'll have to be dealt with. Your heirs or an executor may be able to do the legwork, but if you've got to have an estate attorney handle the details, the bill can quickly add up to a substantial amount.

 

September 12, 2014

News

It appears that the House will vote next week on a bill that would allow the federal government to continue to operate until December 11. Should Congress fail to take action, government operations would cease to operate on October 1, the beginning of the new fiscal year.

Notice 2014-53 (IRB 2014-40) provides guidance on the changes to the funding stabilization rules for single-employer pension plans under the Internal Revenue Code (Code) and the Employee Retirement Income Security Act of 1974 (ERISA) that were made by section 2003 of the Highway and Transportation Funding Act of 2014 (HATFA), Pub. L. No. 113-159, which was enacted on August 8, 2014.

Tip of the Day

Death of a taxpayer . . . The time after an individual dies and when the estate takes over can cause problems when there are time sensitive issues. Generally, when an executor will be able to transact business depends on how fast a will can be probated and the executor officially named. Banks, brokerage houses, etc. can't accept any orders (and the power of attorney the executor may have had expires on the death of the individual) without letters testamentary or similar documents. That can cause major problems. In one case a taxpayer had begun the rollover of an IRA, but then passed away. Several banks refused to open an account in the decedent's name and the check made out to a financial institution could not be cashed. In one case the executor was able a Letter Ruling the IRS granted the executor an additional 60 days in which to complete the rollover. Make sure your will is in order to avoid probate problems, that will insure an executor can be named as quickly as possible. And make sure your executor has as list of all potential heirs so they can be notified (usually a requirement of probating a will). Talk to your attorney to minimize any problems for your executor.

 

September 11, 2014

News

Notice 2014-51 (IRB 2014-40) announces that the Department of the Treasury (Treasury Department) and the IRS will amend the regulations under Section 1298(f) of the Code to provide guidance concerning United States persons (U.S. persons) that hold stock of a passive foreign investment company.

It appears that Congress is getting serious on putting the brakes on corporate inversions. The ownership threshold that triggers whether or not the corporation remains a U.S. entity could be lowered to 50 percent. Other proposals would target the current Code provisions that encourage inversions are also under consideration. However, many legislators acknowledge that ultimately the Code has to be changed to lower corporate tax rates and change our system of taxing foreign operations of U.S. corporations.

The House has approved the Stopping Tax Offenders and Prosecuting (STOP) Identity Theft Bill of 2014. Special task forces would be set up by the Justice Department would target tax return identity theft.

Tip of the Day

IRS Direct Pay . . . The IRS has announced that more than one million tax payments already processed this year through IRS Direct Pay. The IRS is encouraging taxpayers to use the on-line system to pay tax bills, tax amounts due, and quarterly estimated taxes directly from your checking or savings account. You can schedule payments up to 30 days in advance and the system is available 24/7. The system is only available to individuals--businesses have to use the Electronic Federal Tax Payment System (EFTPS). For more information and to make a payment, go to Direct Pay at the IRS Web site.

 

September 10, 2014

News

In Jerry Wayne Green et ux. (T.C. Memo. 2014-180) the taxpayer owed Federal income taxes for 2008 and the taxpayers owed tax assessed for 2009 and 2010. The IRS had placed these three years in currently not collectible status. Nevertheless, the IRS sent the taxpayers two Letters 3172, Notice of Federal Tax Lien Filing and Your Right to a Hearing. The taxpayers requested a Collection Due Process hearing. In the hearing request the taxpayers indicated, among other thing, they could not pay the balance due, they wanted an offer-in-compromise, and they wanted a subordination, discharge, or withdrawal with respect to the liens because they could not borrow money or refinance the mortgage to pay with a lien on the property. They indicated their only income was Social Security. The settlement officer determined they did not meet lien withdrawal criteria because they had been warned of the lien filings through previous notices. The IRS gave the taxpayer 14 days to return a completed Form 433-A (providing information on income and assets) and Form 656, Offer in Compromise. The Court noted that the IRS can withdraw the lien in certain situations, subordinate the lien, or issue a certificate of discharge without full payment being required. But these measures are permissive and the Service is not generally required to do so even if the conditions are fully met. The Court held the settlement officer did not abuse his discretion with regard to these relief measures.

Tip of the Day

Thinking of transferring your business to your children? . . . The odds aren't in your favor. About half of business owners come to the realization that they won't be passing on the business. There are a number of reasons ranging from the fact that the next generation won't want to take over the business to that they won't have the skills to do so. The skills you found so easy to acquire may not come nearly as easy to them. And sometimes it's as simple as child rebellion. Does your child like the business? Always happy to lend a hand? Or do they avoid it? Too often parents delude themselves into thinking their children will take over without taking a realistic view. Not infrequently there are one or more employees on staff who's eager to do so. And you may get your price. It's an avenue worth exploring.

 

September 9, 2014

News

Congress returned to Washington on September 8th with about four weeks available to deal with a number of issues before the election recess, the most important of which is funding the government into the upcoming fiscal year.

In Charles T. Bruce et ux. (T.C. Memo. 2014-178) the taxpayers desired to sell the stock in their S corporation. Their financial planners promoted a plan to cash out the value of the stock and pay no Federal income tax. The husband, who had only a high-school education consulted his attorney and tax advisor who advised the taxpayers the plan was legitimate. The plan was a complicated scheme involving offsetting $5.5 million loans, one of which was labeled a "Swap" and for which the taxpayer claimed a $5.5 million basis. The taxpayer contributed the Swap to a newly formed unitrust in which he retained a remainder interest and the power to substitute for the unitrust's corpus property of equal value. The taxpayer sold his remainder interest to two other newly formed trusts, the beneficiary of each of which was one of his daughters in exchange for $5.5 million in promissory notes. The taxpayer's stock was substituted for the Swap in the belief that each property was of the same value. The daughters sold their interests in the untrusts to the trusts and the unitrust was terminated and the stock distributed to the trusts that transferred the stock to a partnership controlled by the taxpayer. The partnership sold the stock to a third party for cash. The taxpayers reported no gain or loss on the sale of the remainder interest and the taxpayers did not report the original stock was sold. The Court held the taxpayers' gross income includes the full proceeds from the sale of the remainder interest and that the taxpayer's basis in that interest was zero. Alternatively, the taxpayers are considered to have sold the stock directly to the third party and must recognize gain on that sale. The Court disallowed any deduction for the legal and professional expenses related to the sale. However, the Court held the taxpayers were not liable for the accuracy-related penalty because the husband reasonably relied on the advice of his attorney.

Tip of the Day

Considering a franchise? . . . Or starting your own business? If you're thinking about going it on your own or with a franchise because you've been laid off, you want to spend more time at home, etc. think twice before committing. There's much more to running your own business than you might think--and some businesses are worse than others. Hanging out your shingle as a consultant might be easy--if you've got the business contacts, or very difficult if you don't. And while consulting or similar professional jobs may be relatively 9 to 5, running some businesses, such as a restaurant, are extremely high stress and involve a multitude of skills. While it may be true for ongoing businesses as well, for a startup chances are good you won't have much of a backup team. Analyze both your motives for being in business and your skills. You may have a better chance of scoring big on your own, but it may be less risky to invest in a franchise. Bounce your ideas off a CPA and then do your homework.

 

September 8, 2014

News

The IRS has announced that it will not acquiesce in the case of James R. Dixon et ux. (141 T.C. No. 3). In the case the Court made factual findings, that most of an employer's payments represented tax actually withheld at the source within the meaning of Secs. 3402 and 3403, and therefore, as to these payments, the taxpayers were entitled to a credit under Sec. 31(a) toward their income taxes. The Court held that held that the Service was required to honor an employer's designations of these payments and credit the payments to the taxpayers' income tax liabilities. The Tax Court reasoned that designation of its payments to the income tax liabilities of specific employees is consistent with Service policy and federal case law that permits a taxpayer's designation of voluntary payments of tax.

Tip of the Day

Claiming you didn't get the IRS notice? . . . Or one from your state department of taxation? You may not have an argument. First, the IRS or state only has to mail the notice to your last known address. If you've moved and haven't notified the IRS with a change of address form, their responsibility ends when they send it to the old address. Second, you may try to argue the IRS didn't mail the notice. The Service only needs to produce a Certified Mailing List. Make sure your mailing address is updated. File Form 8822.

 

September 5, 2014

News

An audit by the Treasury Inspector General for Tax Administration (TIGTA) complaints against tax return preparers are not timely processed. TIGTA’s review of the 8,354 complaints received in Calendar Years 2012 and 2013, as of September 11, 2013, identified 3,953 (47 percent) for which work on the complaints had yet to be initiated. Of the 3,953 complaints, 1,920 (49 percent) had been in the IRS’s inventory for at least 60 business days with no work initiated. TIGTA also identified that the IRS has not established a process to reconcile complaints received with what was entered into inventory records. TIGTA’s review identified 839 complaints received during December 2012 and January 2013 that were not entered into inventory records until 34 to 64 business days after IRS receipt. To see the full report go to www.treas.gov/tigta/auditreports/2014reports/201440056fr.html.

In Eladio Duarte et ux. (T.C. Memo. 2014-176) the Tax Court reviewed the IRS's collection actions for an abuse of discretion. The Court found it was not clear from the record why the taxpayer's offer-in-compromise was not processed for over a year or how (or whether) the first settlement officer determined the taxpayer's reasonable collection potential. The Court found other contradictory reasons for the IRS's determination to file a notice of federal tax lien. The Court remanded the case to the Appeals Office to conduct a further hearing and to issue a supplemental notice of determination.

You may be able to avoid the accuracy-related penalty if you can show you relied on competent tax advice (and meet certain other requirements). In Terry L. Wright et ux. (T.C. Memo. 2014-175) the taxpayers, though an 100% owned LLC purchased a euro put option and assigned it to a charity. On the entity's partnership return they claimed a $3 million short-term loss which flowed through to the taxpayers. A tax opinion by a law firm was issued to the LLC. The law firm gave a "more likely than not" opinion on the transaction, but the Court noted the firm's principal did not have significant experience relating to the taxation of foreign currency options. The opinion letter stated the firm relied upon certain representations and advice supplied by the LLC. There was a caution in the letter accompanying the opinion stating that the may not be relied upon until we have investor representations fully executed by you. The Tax Court found that the law firm's tax opinion did not constitute, nor did it rely upon, substantial authority. Accordingly, the Tax Court found the accuracy-related penalty appropriate.

Tip of the Day

Property ownership in installment sale . . . Fred sells you a building for $100,000 down and $850,000 payable over 15 years. The contract has restrictions on the subdivision of the land and improvements to the property, but you're required to maintain the property, pay the taxes and insurance, etc. and bear the risk of loss. Despite the restrictions on use, you're considered to have the benefits and burdens of ownership and are entitled to depreciate the building, claim deductions for repairs, insurance, etc. Legal title isn't always required to be the tax owner of the property. Check with your tax advisor to be certain, and make sure you give him all the details.

 

September 4, 2014

News

The IRS has announced (Rev. Rul. 2014-23) that interest rates will remain the same for the calendar quarter beginning Oct. 1, 2014. The rates will be:

In Hector Sanchez (T.C. Memo. 2014-174) the Court found that an individual who operated a recycling business was liable for the 75% civil liability for underpayments due to fraud. The Court found that at least five of the "badges of fraud" were present. The taxpayer underreported his gross income by more than $1 million for each of the four years at issue and reported taxable income of no more than 4.9% of the true amount for any of the years. The Court also noted the concealment of assets, failure to cooperate with tax authorities, implausible or inconsistent explanations of behavior, and a pattern of conduct evidencing an intent to mislead.

Under Sec. 6213(b)(2)(A) if a taxpayer files a request for abatement within 60 days of the issuance of a math error notice, the IRS shall abate the assessment. Further, any assessment shall be subject to the deficiency procedures. In Michael Swiggart (T.C. Memo. 2014-172) the IRS issued a math error notice to the taxpayer stating that the IRS had changed his filing status because the name of the dependent who qualified him for head of household filing status was not reported on his tax return. The Court noted that the IRS was required to abate the assessment, and requiring the taxpayer to prove entitlement to head of household status before abating the assessment was not substantially justified. The Court found that the taxpayer was entitled to recover his litigation and administrative costs.

Tip of the Day

Charitable contributions made in someone else's name . . . Who can take the deduction if you make a charitable contribution in someone else's name? For example, you make a donation for your recently deceased uncle to his favorite charity. Unless you get something in return, you can claim the deduction. It might be a bit tacky, but that's a different issue.

 

September 3, 2014

News

In IRS News Release IR-14-084 the IRS is once again warning taxpayers about telephone scams with individuals who claim to be with the IRS and demand money. The IRS noted that the Service respects taxpayer rights when working out payment of your taxes. So, it’s pretty easy to tell when a supposed IRS caller is a fake. Here are five things the scammers often do but the IRS will not do. Any one of these five things is a sign of a scam. The IRS will never:

  1. Call you about taxes you owe without first mailing you an official notice.
  2. Demand that you pay taxes without giving you the chance to question or appeal the amount they say you owe.
  3. Require you to use a certain payment method for your taxes, such as a prepaid debit card.
  4. Ask for credit or debit card numbers over the phone.
  5. Threaten to bring in local police or other law-enforcement to have you arrested for not paying.

Callers are very convincing. They can spoof caller ID and may have personal information. Go to IRS New Release IR-14-084 for more information on these scams.

Generally, the IRS has three years from the date the return is filed to examine it. That's extended to six years if you underreport your income by more than 25%. In G. Douglas Barkett et ux. (143 T.C. No. 6) the IRS issued a notice of deficiency concerning the taxpayers' Federal income tax for taxable years 2006 to 2009. The IRS sent the notice more than three years but less than six years after the taxpayers filed their 2006 and 2007 returns. The taxpayers argued that under Sec. 6501(a) that the notice is invalid as it relates to 2006 and 2007 because it was sent more than three years after they filed their returns for those years. The IRS contended that the six-year limitations period under Sec. 6501(e) applied because the taxpayers' omitted gross income exceeded 25% of the gross income they stated in their returns. On their 2005 and 2007 returns they reported amounts realized from the sale of investments of more than $7 million and $4 million, respectively, and total gains from such sales of approximately $123,000 and $314,000, respectively. They argued that the amounts they realized, not their gains, should be included in "gross income they stated in their return" for purposes of Sec. 6501(e). The IRS contended that only their gains should be included. The Court said it has held in other cases that gross income includes only a taxpayer's gains from the sale of investment property, not the entire amounts realized from such sales. The taxpayers argue that those cases are inconsistent with the Supreme Court's recent decision in Home Concrete & Supply. The Court said it must decide whether Home Concrete affects its prior cases. The Court held that the Home Concrete decision does not affect its prior cases holding that "gross income" includes only gains from the sale of investments, not amounts realized from such sales. The Court further held that the gross income the taxpayers omitted from their 2006 and 2007 returns exceeded 25% of the gross income they state in those returns, and therefore the six-year limitations period applied.

Tip of the Day

Crisis speech . . . Do you have one? You can't plan for all possibilities, but you should have a speech ready for the most likely crises. If you run a dress shop chances are slim you'll need one. But you manufacture a product that uses several highly volatile chemicals. You should have an idea of what you'd say to the press in case of a fire, explosion, spill, etc. Design and sell computer software? What if someone calls about a bug? Dealership alongside a river? Would you rebuild if you were flooded? You may not need a detailed speech, often an outline of your thoughts is all that's necessary. For the flooded dealership it could be "right now we're concentrating on taking care of our employees. But we don't see any reason why we wouldn't want to reopen right here."

 

September 2, 2014

News

The IRS has draft versions of Form 1095-C, Employer Provided Health Insurance Offer and Coverage, and the accompanying instructions. It has also issued draft versions of Form 1095-A, 1095-B, and the accompanying instructions.

The IRS has released an updated FinCEN Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. This form is to be used for transactions occurring after August 29, 2014. The IRS has also revised Form 8849, Claim for Refund of Excise Taxes.

In Parimal H. Shankar et ux. (143 T.C. No. 5) the IRS disallowed the taxpayer's deduction for contributions to their IRAs, which they claim are deductible because the limitations on deductibility either do not apply or are unconstitutional. The IRS also included in the taxpayer's gross income the value of an airline ticket the taxpayer received by redeeming "thank you" award points that he claims he never received. The IRS also redetermined the taxpayers' alternative minimum tax. The Tax Court held the taxpayers are not entitled to a deduction for IRA contributions because the wife is an active participant in an employer-sponsored retirement plan and the taxpayers' combined modified adjusted gross income was above the phaseout ceiling. The Court also held the taxpayers must include in their gross income the value of the airline ticket received in redemption of "thank you" award points.

Tip of the Day

Switching investment advisors? . . . There's a good chance your new advisor will suggest switching out of some funds you now own into his recommendations. That's neither uncommon nor inappropriate. Just make sure he's not doing it to generate fees for his firm. And, while investment returns are more important than taxes, taxes shouldn't be ignored. Sales of investments where you have a gain will produce taxable income. Your advisor should take into account the holding period (for long-term capital gain purposes) and use losses to offset income.

 

August 29, 2014

News

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

News

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 www.irs.gov/pub/irs-utl/2014-2015_pgp_initial.pdf.

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

News

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

News

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

News

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

News

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

News

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

News

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

News

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

News

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.

 


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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