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September 23, 2016
The IRS is advising taxpayers (IR-2016-124) to retain copies of their tax returns so they can reference their adjusted gross income (AGI) from a prior year. Taxpayers who filed for an extension and face an October 17th filing deadline may find their AGI amount from 2014 will be needed to electronically file. The IRS reminds all taxpayers that they should keep a copy of their tax returns and supporting documents for a minimum of three years. Going forward, keeping copies of tax returns is even more important as the IRS makes changes to protect taxpayers and authenticate their identity. The IRS recommends extension filers using a software product for the first time plan ahead. They should locate a copy of their 2014 tax return or alternatively, order a tax transcript, a process that may take five to 10 calendar days. The adjusted gross income (AGI) is clearly labeled on both the tax return and the transcript. Taxpayers who prepare their own electronic tax returns are required to electronically sign their return by using a five-digit, self-selected personal identification number (PIN). In order to authenticate their identities, taxpayers will now also need to enter either of two items: their prior-year AGI or their prior-year self-select PIN and their date of birth. If married filing jointly, both taxpayers must authenticate their identities with this information. The IRS is phasing out the use of the Electronic Filing PIN, which is no longer available as an alternative except for those taxpayers who had obtained an e-file PIN earlier this year. The IRS emphasizes that those filers may use their e-file PIN for this year only. Generally, tax-preparation software automatically generates the prior-year AGI and/or self-select PIN for returning customers. However, taxpayers who are new to a software product must enter the prior-year AGI or prior-year Self-Select PIN themselves.
In Bonita L. Perry (T.C. Memo. 2016-172) the taxpayer filed a return that showed only a portion of her retirement distributions as taxable income. Some five months after the IRS sent her a Notice CP2000 showing the additional income and a tax deficiency of some $15,000, the taxpayer filed an amended return reporting the additional income but not pay any additional tax with the return. Not long after the IRS issued a second Notice CP2000 indicating receipt of the amended return, but continuing to show the return reporting the lower amount of income. Finally, a few months later the IRS issued a notice of deficiency on the basis of the original return. The IRS showed the same tax deficiency but including an accuracy-related penalty of some $3,000 attributable the substantial understatement. The taxpayer argued that any underpayment penalty should be based on the amended return. The Court noted the amended return was not a "qualified amended return". A qualified amended return is an amended return that is filed before the date the taxpayer is first contacted by the IRS concerning any examination. Thus, the accuracy-related penalty was based on the amount shown on the original return.
For a cash-basis taxpayer (almost all individuals) income is taxable when "constructively received", that means when it's available to you. Just because you don't access the funds or cash the check has no bearing on the taxability. In Maria G. Leslie (T.C. Memo. 2016-171) the taxpayer was to receive alimony equal to a percentage of the fee her attorney husband was to receive. The Court found her ex-spouse segregated the money from his distribution, and directly deposited it into a bank account. The account was in both their names, but she credibly testified she had no control over it. She was not given any checks to sign from the account, and her impression of the payment was that it wasn't yet legally hers. She tried to gain control by filing a declaration in support with the San Diego Superior Court. The ex-spouse opposed her petition, and the state court at first refused to grant it. The Court found the taxpayer did not have control over the funds until some time after that claimed by the IRS and, thus, taxable in a later year as she claimed.
Tip of the Day
Debts paid by another or canceled . . . If another person (or entity) pays a debt you owe, the amount paid is income to you. (Exception. In some cases the payment could be considered a gift, as when a relative pays the debt.) If a creditor cancels the debt, or allows you to pay off the debt for less than the full amount owed, the amount forgiven is generally income. (There are some exceptions, for example if you're insolvent before the debt is forgiven. Check with your tax adviser.)
September 22, 2016
Notice 2016-57 extends the temporary nondiscrimination relief for closed defined benefit plans (i.e., defined benefit plans that provide ongoing accruals but that have been amended to limit those accruals to some or all of the employees who participated in the plan on a specified date) provided in Notice 2014-5 by making that relief available for plan years beginning before 2018 if the conditions of Notice 2014-5 are satisfied.
While the IRS may be able to pierce the corporate veil or disregard and entity, a taxpayer doesn't have the same option. In Barnhart Ranch, Co., et al. (T.C. Memo. 2016-170) the Court found that a corporation incurred the losses in its own right and not as an agent for the individual taxpayers. In addition, the taxpayers advanced no reasonable cause other than their reliance on previous audits, which the Court determined to be lacking. The Court sustained the accuracy-related penalties on the basis of negligence for all years in issue with respect to the taxpayers and not the corporation.
You may be able to avoid liability for a joint return if you can meet the requirements of Sec. 6015 (innocent spouse relief). However, in Adetutu Canty (T.C. Memo. 2016-169) the taxpayer requesting relief stipulated she did not ask to review the returns before they were filed. The Court examined seven factors considered for equitable relief and found that it would not be inequitable to deny relief under Sec. 6015(f).
Tip of the Day
Using a home equity loan? . . . A home equity loan or line of credit can make sense in many situations such as buying that lake property before it's gone, paying off credit card debt, etc. But make sure you're not just rolling over debt so you can incur more. More than a few individuals run up credit card or other debt, use a home equity line to pay off the credit cards and then take or more credit card debt. Ask yourself why you're borrowing. If the reason for the high credit card debt was the result of a nonrecurring event such as a hospital stay or some other unexpected event, the loan makes sense. If this is an ongoing problem, you should be looking at your spending pattern. The same advice can apply to business situations. And maybe you can't judge objectively. Consider talking to a financial advisor or a CPA.
September 21, 2016
Publication 4600, Safeguarding Taxpayer Information Quick Reference Guide for Businesses, has been revised and replaces the previous edition dated October 2008. This publication has been changed from a tri-fold publication to a 1 page, front and back. The purpose of this publication is to be a quick reference tips to provide information on requirements to safeguard taxpayer information, safeguarding techniques, and data security incidents as provided in details in Publication 4557, Safeguarding Taxpayer Data, A Guide for Your Business.
When it comes to auto usage and T&E, documentation is critical and the substantiation requirements for these items are enhanced. Miss one required item and the IRS can, and will, disallow a deduction for that trip, meal, etc. In the case of John R. Galbraith et ux. (T.C. Memo. 2016-168) the taxpayer claimed some $37,152 in car-and-truck expenses for the year at issue using the standard mileage rate. While he provided pages of purported mileage logs for the four vehicles he operated, the discrepancies with the odometer readings make them not credible. The Court also noted that even if it could trust the logs, they didn't identify the business purpose of the expenses, so they still wouldn't meet the documentation requirements of Sec. 274. The Court allowed the same amount as the IRS allowed, $750. The Court also disallowed travel, meal and entertainment expenses where the business purpose wasn't shown. Finally, the Court also disallowed a substantial amount of cell phone expenses noting the billing statements showed a plan for four numbers, only one of which was used for business.
Tip of the Day
Selling property on installment basis? . . . You can't use the method for items that would be included in inventory, for sales of publicly traded property (e.g., stocks), nor for depreciable property to a related party, but other than that there are few restrictions. An installment sale can spread out the gain on a sale over a number of years, saving tax dollars. But if you dispose of--or pledge--the note you receive for the property, the unrecognized gain is taxable in that year.
September 20, 2016
The IRS Whistleblower Office recently issued Publication 5251, The Whistleblower Claim Process. The new publication explains: what qualifies for an award; how to submit a claim for award; what happens to a claim after the IRS receives it; how to communicate with the IRS after a claim is submitted; the whistleblower process timeline; and common reasons for initial rejection or denial of claim.
In Ronald W. White (T.C. Memo. 2016-167) the taxpayer was a pastor who did not file a Federal income tax return for any of the years at issue, nor did he file a timely certificate of exemption from self-employment tax. The IRS filed substitute for returns for the years at issue. The taxpayer was a pastor who ministered from the pulpit and at nursing homes, helped build churches on foreign soil, established a feeding program for children, and supported widows and orphanages. The unreported income was based on amounts the nonprofit corporation paid on behalf of the pastor for his personal expenditures. The taxpayer claimed a vow of poverty. The Court noted that it has previously held that a vow of poverty does not insulate a pastor from tax liability even when the pastor receives funds directly from his church in exchange for services rendered if the pastor does not remit those funds to the church in accordance with his vow of poverty, has control over the funds, and uses the funds for personal expenditures. The Court went on to say that Rev. Rul. 77-290 states that income earned by a member of a religious order on account of services performed directly for the order or for the church with which the order is affiliated and remitted back to the order in conformity with the member's vow of poverty is not includible in the member's gross income. That wasn't the case here where the taxpayer had signatory authority over the nonprofit's apostolic bank account, and the payments the entity made on his behalf served only to benefit the taxpayer in meeting his living expenses. The Court held the amounts paid by the entity on his behalf represented taxable income. The taxpayer was also liable for the self-employment tax because he failed to file a timely exemption certificate.
Tip of the Day
Do the math . . . In this case the math is pretty simple. You're renting space in your building to Madison LLC. Their lease is expiring and you want to increase the rent from $5,000 a month to $6,000. Madison balks and says it can't justify the additional amount and leaves. It takes 6 months to find a tenant and get the space occupied at $6,000. Result? You'll have lost the $5,000 per month you would have gotten from Madison, a total of $30,000, because the space was vacant. You got an extra $1,000 per month, but it'll take 30 months before you break even. Was it worth it? By the numbers, probably not, especially if you include any concessions and costs you may incur for a new tenant. On the other hand, there may be other considerations. You may have been able to up Madison's rent by a smaller amount and got them to renew for five years. Or the space may be underpriced and holding out for the higher rent will set a precedent for higher rents on renewals of other tenants. Just go through the numbers and consider the length of time it will take to get a tenant in the space.
September 19, 2016
Notice 2016-55 (IRB 2016-40) provides guidance for income and employment tax purposes on the treatment of cash payments made by employers under leave-based donation programs for the relief of victims of the Louisiana storms. Under leave-based donation programs, employees can elect to forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to charitable organizations described in Sec. 170(c). The guidance is similar to that provided for Hurricane Katrina and Hurricane Sandy. The Service will not assert that cash payments an employer makes to Sec. 170(c) organizations in exchange for vacation, sick, or personal leave that its employees elect to forgo constitute gross income or wages of the employees if the payments are (1) made to the charitable organizations for the relief of victims of the Louisiana storms and (2) paid to the Sec. 170(c) organizations before January 1, 2018. Electing employees may not claim a charitable contribution deduction with respect to the forgone leave excluded from compensation.
Announcement 2016-32 (IRB 2016-40) requests comments on ways in which Treasury and the IRS can facilitate compliance with the qualification requirements for qualified plan documents in light of the changes to the determination letter program described in Rev. Proc. 2016-37.
Tip of the Day
Learn to delegate . . . Failure to delegate is one reason many small businesses don't grow beyond a certain point or fail when they get bigger. Even some of the greatest artists had assistants or students to whom they delegated some of the work. Failing to delegate can cause major problems as the firm grows because the owners can't handle all the tasks they once did. It can also cause problems if the owners become disabled or are otherwise unavailable to deal with the problem or issue. Finally, the death of an owner can be devastating to the business. A premature death can result in the business folding. Trying to sell a business where the deceased owner was critical to all aspects can result in a fire sale price. There's a side benefit to delegating. Giving employees some control over their jobs can improve morale.
September 16, 2016
Notice 2016-52 (IRB 2016-40) provides guidance relating to certain transactions, undertaken in anticipation of foreign-initiated income tax adjustments, which will be considered foreign tax credit splitter arrangements under Section 909.
The IRS will conduct systems maintenance outage on Saturday, September 17, 2016, from 12:00 A.M. ET to 12:00 P.M. ET. In addition, there will be an extended maintenance outage on Sunday, September 18, 2016, from 12:00 A.M. ET to 12:00 P.M. ET. The AATS and Production environments will be unavailable during the maintenance. Please refrain from accessing the AIR System for both the A2A and UI Channels during these maintenance periods.
In Cri-Leslie, LLC, Donald W. Wallace, Tax Matters Partner (147 T.C. No. 8), the tax matters partner for a limited liability company treated as a TEFRA partnership for Federal income tax purposes, asserted that the partnership was entitled to capital gain treatment under Sec. 1234A for its right to retain forfeited deposits of $9,700,000 from a canceled sale of real property used in its trade or business in the 2008 tax year. The real property was not a “capital asset” as defined in Sec. 1221(a) but was Sec. 1231 property. The Tax Court held the partnership was not entitled to capital gain treatment on the forfeited deposit. Sec. 1234A applies only to capital assets, not to Sec. 1231 property.
Tip of the Day
Cross selling . . . The marketing concept recently got some bad press, but done correctly, it's a great approach to improving sales and profits. The idea is to sell additional products to existing customers. Existing customers are usually easier to sell to, and, often to service. For example, you sell and deliver heating oil. Selling service and service contracts to your customers should be easy. Selling propane for cooking and backup generators is another possibility. In some cases you may even be able to gain efficiencies on servicing customers. But you should be aware that cross selling won't boost sales forever. You've got to get new customers to replace those that leave.
September 15, 2016
REMEMBER--September 15th is the filing deadline for S corporations, partnerships, and trusts on a calendar year with an extension. Estimated tax payments for individuals are also due.
The House has passed legislation that would reinstate the 7.5% medical expense threshold for all taxpayers. Currently, the lower 7.5% threshold only applies to individuals age 65 or older and that exemption expires at the end of 2016. After that the threshold for all individuals would be 10%.
The IRS has announced (Rev. Rul. 2016-23) that interest on over- and underpayments for the fourth quarter will remain the same as for the third. That is, rates on over- and underpayments for noncorporate taxpayers will be at 4%; for corporations they will be 3% on overpayments and 4% on underpayments. The rate for large corporate over- and underpayments will be 1.5% and 6%.
For Tax Year 2011, IRS records show that approximately 400,000 taxpayers converted more than $10 billion in assets from Traditional to Roth Individual Retirement Arrangements (IRA). The IRS uses its Automated Underreporter (AUR) Program to systemically match third-party documents with tax returns to identify potential retirement plan discrepancies, such as tax noncompliance issues associated with Roth IRA conversions. Underreported taxes due on these conversions result in lost revenue to the Government. The Treasury Inspector General for Tax Administration (TIGTA) initiated and audit to assess whether the IRS has sufficient processes in place to address taxpayers who underreport taxes due when converting assets to Roth. TIGTA found the IRS has processes in place to address taxpayers who underreport taxes due when converting assets to Roth IRAs; however, AUR Program employees did not always follow these processes, and improvements can be made to lessen taxpayer burden. TIGTA identified a population of 18,382 potential Roth IRA conversion compliance cases worked by the AUR Program in Tax Year 2011 and reviewed a random sample of the cases. The IRS correctly followed its processing guidance for 335 (87 percent) of 383 sampled cases. For the remaining cases, the procedures that are designed to ensure accuracy and consistency in working Roth IRA conversion cases were not followed. The resulting 13 percent error rate for these Roth IRA conversion cases is higher than the 7.4 percent error rate estimated by the IRS for all types of cases worked by the AUR Program. This occurred because, in some instances, guidance for processing Roth IRA conversions was unclear and, in others, the guidance was not followed by AUR Program personnel. In addition, IRS management stated that Roth IRA conversions are one of the more complex issues handled by AUR Program personnel. TIGTA recommended that the IRS: 1) clarify guidance and educate AUR Program personnel on Roth IRA conversion issues; and 2) update processes and procedures to consider available information prior to issuing notices to taxpayers. For the full report go to www.treasury.gov/tigta/auditreports/2016reports/201610054fr.pdf.
Tip of the Day
Doing business in more than one state? . . . Even if you do so using more than one entity, you've got to be careful. More states are looking at intercompany transactions because they can distort income. By improper pricing of goods or services to related parties, a company in a state with low rates can generate higher profits while depressing the profits of a related company in a high tax state. Licensing of intangibles or the rental of property can do the same thing. Consult with your tax advisor on the best approach to handling the problem.
September 14, 2016
As a result of severe storms, and flooding in Wisconsin on July 11 and 12, 2016, the president has declared the counties of Ashland, Bayfield, Burnett, Douglas, Florence, Iron, Sawyer, and Washburn and the Bad River Band of the Lake Superior Chippewa Tribe eligible for government assistance. As a result, taxpayers in those counties who sustained losses from the disaster may deduct the losses on their 2015 or 2016 returns.
In Renee Vento, et al. (147 T.C. No. 7) the taxpayers did not file U.S. Federal income tax returns for 2001 but instead filed individual territorial income tax returns with the Virgin Islands Bureau of Internal Revenue for that year. They now concede that they were not bona fide residents of the Virgin Islands for 2001. They seek to credit against their U.S. tax liabilities for that year, under Sec. 901, payments made with their Virgin Islands returns and estimated payments they made to the U.S. Treasury for 2001 that were later “covered into” the Virgin Islands Treasury under Sec. 7654. The Court held that the taxpayers were not allowed to credit against their U.S. income tax liabilities under Sec. 901 the amounts paid as tax to the Virgin Islands for their 2001 taxable years. First, they failed to establish that their determination that they were subject to Virgin Islands tax rather than U.S. tax for 2001 was based on a reasonable interpretation of applicable law and that they had exhausted all effective and practical means of securing a refund of the amounts paid to the Virgin Islands. Consequently, the taxpayers did not meet their burden of proving that the amounts in issue were “taxes paid” within the meaning of Reg. Sec. 1.901-2(e). Second, the limitation on foreign tax credits imposed by Sec. 904 applies to taxes paid to the Virgin Islands, and the taxpayers failed to establish that the amounts in issue did not exceed the applicable limitations. Finally, allowance of the claimed credits would be inconsistent with Congress' intent that payments of Virgin Islands tax by U.S. citizens or residents not be creditable under Sec. 901.
Tip of the Day
Why a cashflow forecast? . . . The nature of businesses varies widely. Some are highly profitable, some have slim margins. And some that are great margins are cash hogs. One company manufactured custom equipment based on stock components. The margins were high, but it took several months to complete a unit and additional time to install, test, and get customer acceptance. (For several reasons the company could never get much more than 10% of the final price before acceptance.) The total time from receiving an order to getting paid was almost a year. The business was growing and very profitable, but as it grew it required more and more cash to purchase parts, pay workers, etc. The company struggled until it was able to sell maintenance contracts where customers paid upfront for a year of support. The contracts not only improved cashflow, they helped convince a lender that the business was stable enough to support a loan.
September 13, 2016
The IRS is expanding open season for new applicants to become Acceptance Agents or Certifying Acceptance Agents. Form 13551, Application to Participate in the IRS Acceptance Agent Program, can be submitted year-round. In addition, CAAs can now certify additional identification documents for dependents. You can find more information at New ITIN Acceptance Agent Program Changes.
The IRS has 10 years from the date of assessment to collect any unpaid taxes. In Anthony J. Doldin, et al. (U.S. District Court, E.D. Wisconsin) the taxpayer argued that the IRS was trying to collect his original 2001 and 2002 taxes which the IRS more than 10 years before bringing the current action. But the IRS made assessments on March 7, 2005 under Sec. 6213(b)(3) which provides that, if the IRS finds that it has credited a taxpayer excessively because of a tentative carryback adjustment, it can assess the excess as a deficiency “as if it were due to a mathematical or clerical error appearing on the return.” The Court held that the 10-year limitations period had not run based on the later assessment.
Tip of the Day
It's not the rate . . . Politicians talk about simplifying taxes by cutting the number of rates for individuals to just three. In truth, computing the tax isn't the problem. Some 80% of returns are now filed electronically, that is, they're done on computer. Probably a significant percentage of additional returns are prepared on computer, but for one reason or another are not filed electronically. Preparing a return for many "normal" individuals (e.g., have a regular job, interest and dividend income and deductions for taxes, mortgage interest and charity) is easy enough for many taxpayers. Many rules are built into the software and the program will handle your data correctly, if you enter it correctly. Married? You'll probably want to file as joint--but not always. Single? That's easy. But can you file as head of household? Have medical expenses? Entering them is easy using software--the computer will do the calculations. But what expenses qualify for the medical deduction? Take a distribution from an IRA or pension plan before age 59-1/2? That usually means a penalty--but there are a number of narrow exceptions. Simplifying the Code is a complex undertaking that involves more than a few broad strokes. Income averaging for most individuals was eliminated 30 years ago--but not for farmers. There are many provisions that provide relief for specific groups of individuals. In some cases they make the Code fairer (many farmers have wide swings in income) or provide an incentive (for education, small business, etc.), but they also make the Code far more complex. Tax simplification may be a nobel pursuit, but not an easy one.
September 12, 2016
Ron Wyden (D-Ore.), ranking member of the Senate Finance Committee, has released a discussion draft with respect to retirement savings. The proposals of interest are an increase in the age for beginning required minimum distributions to age 73 (from 70-1/2) for IRA, SIMPLE, and SEP plans and eliminate RMDs on accounts with less than $150,000. The proposed legislation would put restrictions on Roth conversions to accounts valued at more than $5 million and make the savings credit refundable.
The IRS has issued final regulations (T.D. 9783) providing guidance relating to the minimum present value requirements applicable to certain defined benefit pension plans. These regulations change the regulations regarding the minimum present value requirements for defined benefit plan distributions to permit plans to simplify the treatment of certain optional forms of benefit that are paid partly in the form of an annuity and partly in a single sum or other more accelerated form. These regulations affect participants, beneficiaries, sponsors, and administrators of defined benefit pension plans.
Tip of the Day
Vendor, subcontractor, bank taken over? . . . While it can depend on the type of acquisition and the terms, generally the buyer has to honor the contract. But once that contract expires or if modifications are made (e.g., an increase in your credit line) the new owner may want to change the terms. You could find that the friendly bank you've been dealing with for the past 10 years is now another mega-bank who could care less about your problems. Because the chances of this happening are generally small, you can't spend time planning. But you should be aware of the possibility and don't completely ignore overtures from a new supplier, bank, etc. It makes sense to keep informed of your options. You never can tell when you might have to switch.
September 9, 2016
The rules for auto recordkeeping generally require a contemporaneous log of each trip (there are a limited number of special exceptions). In Sam D. Kilpatrick (T.C. Memo. 2016-166) the Court found the taxpayer used a calendar and MapQuest to prepare a log at least two years after the business use of the car. The Court held that neither the calendar nor the MapQuest directions were "made at or near the time of the" use of the car. In addition, the calendar did not contain other required information such as the places, business appointments or the business purpose of the travel. The Court only allowed the deduction for auto expenses allowed by the IRS. On a second issue the Court disallowed deductions for office furnishings. The Court found the taxpayer did not elect Section 179 expensing. Thus, any deduction could only be through a depreciation deduction. But the Court noted that the furnishings were antiques (determined from where they were purchased and by the photographs presented) and that they would not be adversely affected by the passage of time or the taxpayer's use of them. The Court held that under the current depreciation rules, as under prior law, no depreciation deduction should be allowed for antiques.
In In re: Wendy K. Pitts, Debtor, et al. (U.S. Court of Appeals, Ninth Circuit) the Appeals Court upheld a District Court ruling that the IRS could use administrative collection procedures to collect a tax debt from the general partner of a partnership because she was secondarily liable for the partnership's assessed debt. The IRS was not obligated to make a second assessment against the general partner individually, because the consequences of its assessment attach to the assessed debt “without reference to the special circumstances of the secondarily liable parties.”
Tip of the Day
Penalty vs. income on early qualified plan distributions . . . Generally, distributions from your pension plan or IRA before age 59-1/2 are subject to a 10% penalty. There are a number of exceptions including disability, retirement at age 55, to pay health insurance premiums, higher education expenses, etc. But these exceptions only apply to the penalty. You'll still owe income tax on the distribution.
September 8, 2016
Congress has returned from summer recess and sat down to business. Of prime importance is the fact that the new fiscal year begins on October 1, and there is no budget in place for FY 2017. Without an appropriations bill, the only other way the government could be funded is with a continuing resolution. That could extend funding through the end of the year, but at some point a budget would need to be passed.
As a result of severe storms, tornadoes, flooding, landslides and mudslides in Kentucky from July 2 through July 9, 2016, the president has declared the counties of Adair, Butler, Caldwell, Calloway, Christian, Clay, Crittenden, Daviess, Edmonson, Hart, Hopkins, Livingston, Lyon, Marshall, Metcalfe, Ohio, Todd, Trigg, Union and Webster eligible for government assistance. As a result, taxpayers in those counties who sustained losses from the disaster may deduct the losses on their 2015 or 2016 returns.
Tip of the Day
False business start? . . . It's not unusual to start an LLC, corporation, etc. and then abandon the effort. What action you have to take will depend on the entity, the activity of the business, etc. If you had any sales you'll have to report them on a return (Schedule C for an sole proprietorship, 1120S for an S corporation, etc.). In the case of a corporation, a formal dissolution with the state is necessary. You may have to take some action on an LLC, partnership, etc. at the state level. Even if the business had no activity, if the IRS notifies you a return is due, you must file the appropriate return. If a federal return is required, you should file a state return. (Check the rules in your state; in many cases a payment is due.) You should also notify the IRS your EIN number is no longer needed. If you started other accounts--sales tax, excise taxes, withholding, state and federal employment and income returns, etc. you might have to cancel those. In some cases it's as easy as checking the "final return" box on the return. But failure to do so could result in penalties. As always, state rules vary. Your CPA or other tax advisor may have a checklist.
September 7, 2016
The IRS has again added to the list of parishes qualifying for relief as a result of the severe storms and flooding that took place In Louisiana beginning on August 11. The additional parishes are St. James and West Baton Rouge.
The IRS has announced a change in address as of June, 2016 for all applications for discharge of any estate tax lien to the IRS’s Advisory Estate Tax Lien Group for processing. Submit the application and required documentation on Form 4422, Application for Certificate Discharging Property Subject to Estate Tax Lien. For the address and additional information go to New Address to Send Applications for Discharge of the Estate Tax Lien. The application should be submitted at least 45 days before the transaction date that the certificate of discharge is needed.
Tip of the Day
Bonus depreciation . . . Tax law allows you to take 50-percent bonus depreciation in the year equipment is placed in service. That provision was extended at the end of 2015 through 2017 and, with a lower percentage, for an additional two years. That means you can write off 50 percent of the purchase price in the first year plus take the regular depreciation rate on the remaining 50 percent. Taking the bonus depreciation is the rule, but you can elect out for all property in a "class". Thus, if you purchase five trucks (5-year property) and $65,000 in office furniture (7-year property), you can elect not to take bonus depreciation on the trucks or the furniture, or both, but you can't select which trucks to use the election on. Generally, taking depreciation up front makes sense. It's a great way to boost your cash flow. But spreading the deduction over time might make sense for a startup or a business that expects taxable income to be considerably higher in the future. The analysis may not be easy. There are a number of considerations including assets in the class, your current and future tax rate, the availability of the Sec. 179 expense option, etc. Don't elect out before getting professional advice.
September 6, 2016
Notice 2016-50 (IRB 2016-38) provides updated static mortality tables to be used for defined benefit pension plans under Sec. 430(h)(3)(A) of the Code and sec. 303(h)(3)(A) of the ERISA. These updated tables, which are being issued using the methodology in the existing final regulations under Sec. 430(h)(3)(A), apply for purposes of calculating the funding target and other items for valuation dates occurring during calendar year 2017. This notice also includes a modified unisex version of the mortality tables for use in determining minimum present value under Sec. 417(e)(3) of the Code and Sec. 205(g)(3) of ERISA for distributions with annuity starting dates that occur during stability periods beginning in the 2017 calendar year.
Tip of the Day
Get a policy . . . Then put it in writing and inform employees. You can't discipline an employee for an infraction if there's no rule against it. For example, Fred uses the company truck to run some local errands when there's free time between calls. His former employer allowed it, so he just assumed you would. If there's no policy, your options may be limited to putting a warning in his file. You can't cover every base, and some rules may be obvious, but you should have policies for the important rules.
September 2, 2016
The IRS has issued final regulations (T.D. 9785) containing amendments to the estate tax regulations, gift tax regulations, generation-skipping transfer tax regulations, the employment tax and collection of income tax at source regulations and the regulations on procedure and administration. The regulations provide guidance on the terms spouse, husband, wife, and marriage.
The IRS has released a number of Statistics of Income bulletins including:
For more information, go to SOI Tax Stats - What's New.
The decision by the European Union that Apple owes Ireland some $14.6 billion in taxes has stirred the ire of both Republican and Democrat legislators, noting the impact on American businesses. This could provide new impetus for Congress to work on changes to the tax code.
Tip of the Day
Everyday low price? Better than occasional sales? . . . We'd like to think so. But, more than likely, it depends on your market. Not long ago one clothing retailer switched to the everyday low price approach. Turns out it didn't work. A competitor seems to have two sales a week and is doing fine. No haggle car pricing? Same story. It could be that we're so accustomed to sales that we don't believe there is such a thing as everyday low pricing. Or it could be that customers can't believe a business can switch. It could be that we just feel that finding a bargain is like we're getting more for our money, something we all want to do. The actual reason sales may be a better approach doesn't matter. Just find the approach that works for you and don't fight it. By the way, while a sale may improve revenue by generating interest or getting rid of slow-moving items, if you're selling to other businesses (rather than consumers) frequent sales may be counterproductive. Few businesses want to see their costs vary from week to week.
September 1, 2016
The direct contact provisions of Code Sec. 7521 generally require IRS personnel to stop a taxpayer interview whenever a taxpayer requests consultation with a representative and prohibits IRS personnel from bypassing a qualified representative without supervisory approval. The Treasury Inspector General for Tax Administration (TIGTA) initiated and audit because it is required to annually report on the IRS’s compliance with the direct contact provisions of the Code. The overall objective of this review was to determine whether the IRS complied with legal guidelines addressing the direct contact of taxpayers and their representatives as set forth in Secs. 7521(b)(2) and (c). TIGTA found the IRS has a number of policies and procedures in place to help ensure that taxpayers are afforded the right to designate an authorized representative to act on their behalf in dealing with IRS personnel in a variety of tax matters. In addition, the IRS has a process to handle the review and disposition of taxpayer allegations of direct contact violations. Each year, TIGTA focuses on one IRS office or function that interacts with taxpayers and their representatives on a routine basis. For this year’s review, TIGTA analyzed the extent to which revenue agents in the Small Business/ Self-Employed Division’s Field Examination function are complying with the direct contact provisions of the Code during interactions with taxpayers or their representatives. Using computer software, TIGTA systemically searched electronic workpapers for key words that would indicate a potential direct contact violation had occurred. The systemic search initially identified 493 documents from 391 field examination cases that contained information indicating potential direct contact. TIGTA reviewed select examination case information in each document and did not identify any revenue agent violations of the direct contact provisions of Secs. 7521(b)(2) and (c) during the fiscal year. To read the full report, go to www.treasury.gov/tigta/auditreports/2016reports/201630067fr.pdf.
You can only make an IRA contribution if you have earned income (wages, self-employment income, etc.); pension and annuity income, dividends, interest, etc. is not earned income. In Mary E. Barie et vir (T.C. Memo. 2016-160) the Court sided with the IRS that the taxpayers had no earned income and didn't qualify for an IRA deduction.
You may get out of an accuracy-related penalty by blaming your accountant or tax professional for bad advice, but it's rare that you can escape the failure to file penalty by blaming him or her. In Johnnie C. Walker (T.C. Memo. 2016-159) the Court held that the taxpayer's explanation of reliance on an accountant for filing an extension did not get her out of a late filing penalty.
In Estate of Travis L. Sanders, Deceased, Thomas S. Hogan, Jr., Personal Representative (U.S. Court of Appeals, Eleventh Circuit) the Appeals Court vacated and remanded the Tax Court's (144 T.C. No. 5) holding that the taxpayer was a bona fide resident of the U.S. Virgin Islands.
Tip of the Day
Selling your business? . . . How easy or difficult it is can depend on a number of factors, but operating multiple, diverse businesses can make selling tougher. For example, you operate a successful auto repair shop that's next door to your steel fabrication and welding business. You know both businesses well and the welding shop does a substantial amount of custom work on cars. But that may not be true for many entrepreneurs and selling the two businesses together could be difficult. If you have such a situation you might want to plan even further ahead in selling out. One possibility is to make sure the two (or more) businesses can be sold separately. That might entail legal and tax advice for a separation. Talk to your CPA and/or a professional broker.
August 31, 2016
The IRS does not currently notify taxpayers it identifies as victims of employment-related identity theft, nor has it established an effective process to ensure that it sends the required notice to the Social Security Administration (SSA) to alert the SSA of earnings not associated with a victim of employment-related identity theft. These are two significant findings in an audit report by the Treasury Inspector General for Tax Administration (TIGTA). Employment-related identity theft occurs when someone uses the identity of another person to gain employment. Taxpayers may first realize they are victims of this type of crime when they receive an IRS notice of a discrepancy in the income they reported on their tax return. The IRS’s Automated Underreporter (AUR) program identifies such discrepancies when it matches taxpayer income reported on third-party information returns (e.g., Forms W-2, Wage and Income Statement) to amounts that taxpayers report on their individual income tax returns. TIGTA conducted this audit to evaluate the IRS’s AUR processes to identify and assist victims of identity theft. During the period February 2011 to December 2015, the IRS identified almost 1.1 million taxpayers who were victims of employment-related identity theft. In April 2014, the IRS started a pilot initiative to begin notifying taxpayers that they may be a victim of employment-related identity theft. TIGTA’s review of the pilot notification initiative found that the IRS did not sufficiently design the pilot to include a representative sample of employment-related identity theft victims. Further, TIGTA found that the IRS has not established an effective process to ensure that it sends the required notice to alert the SSA of earnings not associated with a victim of employment-related identity theft. To read the full report go to www.treasury.gov/tigta/auditreports/2016reports/201640065fr.pdf.
In Shea Homes, Inc. et al. (U.S. Court of Appeals, Ninth Circuit) the Court affirmed the Tax Court's decision that the taxpayer's use of the completed-contract method of accounting for the construction of a home development was an acceptable method of accounting. The Court noted that until taxpayers' work was complete, they had an obligation to fulfill their promises regarding the development that they had induced the buyers to become a part of. That included the improvements to the development as well as the houses and lots.
Tip of the Day
Investment strategy for retirement . . . The general advice is that as you get older you should shift more and more of your funds into safer investments. Many interpret that to mean from stocks to bonds. And for many individuals the rule makes sense. But for individuals and couples who plan to leave the bulk of their investments to their children and don't need the income, moving into safer investments may not be as important. For example, Fred and Sue each have about $70,000 in pension, social security, and income from rental properties. They have no debt and live modestly. They actually have funds left over at the end of each year. While some of their investments are risky, long-term they should do fine and their children will be able to reap the benefits. There's no one answer here. What if the bulk of their income came from Fred's social security and pension and he has health issues? Make sure your investment advisor understands your situation and needs.
August 30, 2016
Revenue Procedure 2016-48 (IRB 2016-37) provides guidance to taxpayers for making certain elections and filing amended returns to avail themselves of extenders from the PATH Act. The PATH Act of 2015 generally extends the application of the additional first year depreciation deduction (bonus depreciation), the election out of bonus depreciation for round 5 extension property, and the expensing provision for qualified real property, for property placed in service in 2015.
If you have a net operating loss, you can use it to offset income in a prior (up to 2 years back) or subsequent years (up to 20 years forward). But you've got to be able to show you actually incurred an net operating loss and that you didn't utilize all of it in prior years. That means saving your documentation for the year of the loss and intervening years, even though the statute of limitations would have run out. In Gregory A Power et ux. (T.C. Memo. 2016-157) the taxpayer was unable to show that he incurred a loss or that any of it still remained unutilized. The Court noted that the tax returns, by themselves, were not sufficient to prove a loss. In addition, the Court found the taxpayer did not have sufficient basis in his S corporation.
In Abraham J. George (T.C. Memo. 2016-156) the taxpayer was employed as a car salesman at a New York automobile dealership. He alleged that he was repeatedly harassed by his coworkers because of his national origin. Allegedly because of this harassment, he left the dealer's employ. He subsequently secured employment with another automobile dealership and sued the first dealership, alleging he had suffered psychological and physical harms and been constructively discharged. The taxpayer entered into a settlement and released the dealership against all claims. The settlement agreement did not mention any physical or emotional injury nor did it state any portion of the settlement was for physical or emotional harm. The Court found the award was not excludable from the taxpayer's income. It did find, however, that his legal fees were deductible as an above-the-line deduction.
Tip of the Day
Just because it's difficult . . . That's no reason to put off making a sales forecast for a startup or new product. With little or no outside guidance to go on, making that type of sales forecast is difficult and getting close may be near impossible. But you'll acquire new knowledge about the market by just trying to arrive at a forecast. You may discover problems that need to be solved (e.g., distribution, manufacturing), new ways to market the product or service, etc. Hopefully you'll get an idea of the revenue potential to determine if you can cover your costs, pay off any debt and get a return on your investment.
August 29, 2016
Revenue Procedure 2016-45 (IRB 2016-37) modifies Rev. Proc. 2016-3, which sets forth areas of the Internal Revenue Code on which the IRS will not issue letter rulings or determination letters (no-rule areas), by removing two no-rule areas relating to distributions of stock of controlled corporations under Sec. 355 of the Code.
Qualified farm property in an estate can receive special treatment under the estate tax (Sec. 2032A) under a special use valuation rule. Rev. Rul. 2016-19 contains a list of the average annual effective interest rates on new loans under the Farm Credit System used in the valuation process. This revenue ruling also contains a list of the states within each Farm Credit System Bank Territory.
Several states have created savings opportunities for residents by allowing automatic enrollment in an Individual Retirement Account if they don't have access to a workplace savings arrangement. But uncertainty about federal law has discouraged other states and municipalities from moving forward with payroll deduction IRA programs. The U.S. Department of Labor’s Employee Benefits Security Administration is making public a final rule that assists states that create IRA programs for workers who do not have access to workplace savings arrangements. At the same time, in response to public comments, the department is making public a proposed rule that could facilitate a limited number of cities and other local governments doing the same. For more information go to www.dol.gov/newsroom/releases/ebsa/ebsa20160825.
Tip of the Day
Orphan plans . . . The IRS is advising employers that sponsor one-participant plans to take the necessary steps to prevent a qualified retirement plan from becoming an orphan plan--a plan that no longer has a plan sponsor. One of the most common reasons why a retirement plan becomes an orphan plan is because the plan sponsor no longer exists. For example, the participant retires, passes away or abandons the plan before properly terminating it. When the sole proprietor with a one-participant plan retires, the assets must be distributed and the plan must be terminated. A distribution involves either rolling over the assets into an IRA or taking a taxable distribution.
August 26, 2016
TThe IRS will conduct its annual Labor Day power outage beginning Saturday, September 3, 2016, starting at 8:00 p.m. and ending Tuesday, September 6, 2016, at 6:00 a.m. The Modernized E-File Systems (both Production and ATS) will not be operational during this timeframe.
The House Majority Leader has announced that after returning from summer recess it will vote on legislation exempting Olympic and Paralympic medals and awards from taxable income.
Many small businesses can use the cash method of accounting. That's what the taxpayer in Mark L. Nebeker (T.C. Memo. 2016-155) used, at least in part. The taxpayer was a consultant for aerospace and defense companies and did business as a sole proprietorship. He reported his income on the cash method, but deferred the deduction of amounts paid to his subcontractors and reimbursed expenses until he was paid by his clients. The IRS and the Court found that the approach failed to clearly reflect income. The Court held that he had to use the cash method for deducting expenses and that the adjustment was a material item and required a change in accounting method under Sec. 481.
Tip of the Day
Know your customers' price points . . . Some customers will pay full price, rarely looking for a bargain. Another group may spring when they hear 15% off. And then there are the diehards who watch for the sales and won't order until they see 25% off and free shipping. If you're careful about tracking your customers, you should be able to identify a good portion of them. By not letting your full price customers see all the sales you'll get your best margins from that group. You can also try to get the hard core discount shoppers to make some of their purchases at the 15% off sales.
August 25, 2016
Think twice before ignoring IRS requests. In Alfred B. Barrion (T.C. Memo. 2016-153) the taxpayer did not file an income tax return for 2012. Based on third party reports, the IRS prepared a substitute for return and subsequently sent the taxpayer a timely notice of deficiency determining a tax deficiency and additions to tax. The IRS had determined the taxpayer had unreported income. The taxpayer petitioned the Tax Court and in the petition he did not assign error with respect to either item of unreported income. The IRS served the taxpayer with a request of admissions, a request for production of documents, and interrogatories. The taxpayer ignored all of these discovery requests. Because he failed to respond to the request for admissions, the matters therein were deemed admitted. In addition, because the taxpayer provided no documentation as to exemptions and itemized deductions, the Court found he was entitled to only one exemption and the standard deduction.
Tip of the Day
Do you need to pay estimated tax? . . . More than a few taxpayers are used to paying estimated tax. Business owners may me required to do so for a number of reasons, but even retired individuals can be caught in a trap. In some cases you may be able to adjust your withholdings upward, but not infrequently that's not possible. For example, you were making $250,000 a year, but now you're getting a $25,000 salary from your S corporation. Your share of the S corporation's income will be $100,000. There's no way a sufficient amount can be withheld from your salary. A similar situation can occur when you retire and have dividend and capital gain income and can't have enough withheld from your pension or social security. Same thing if you're earning money as a sole proprietor or partnership. Get IRS Publication 505, Tax Withholding and Estimated Tax and/or talk to your tax advisor.
August 24, 2016
Earlier this year the IRS issued proposed debt-equity regulations. Members of both house of Congress on both sides of the aisle have voiced concern over the regulations and noted that many business could be hurt by the regulations.
You may be able to avoid a failure to file penalty if you can show reasonable cause. But the IRS and the courts have found few good reasons. One is if you're ill. But in Refco Public Commodity Pool, L.P., Debtor (U.S. Bankruptcy Court, D. Delaware) the partnership was found not liable for the penalty. Most of the partnership's income came from another partnership that failed to provide a K-1. While the second partnership did provide some information, it was not in a form that could be useful and it contained such errors that made it virtually useless. The Court noted the partnership exercised reasonable care and evaluated the consequences of not filing against filing a inaccurate return that would have generated other penalties. The Court found the failure to file was beyond the partnership's control. (Bear in mind that the decision was one by the Bankruptcy Court and depended heavily on the facts and circumstances.)
In another failure to file case, Carolyn Rogers (T.C. Memo. 2016-152), the taxpayer's apartment had a fire. A second fire not long after the first added to her problems. The taxpayer had bouts of depression and fell on a subway platform. She believed the loss could be claimed in the following year (when the claim was resolved with her insurer) and the loss offset her income. As a result she assumed she didn't have to file. But the loss should have been claimed in the year of the fire because there was no reasonable prospect of recovery. The Court noted the taxpayer's failure to file was not chronic as in many other cases of not or late filing, and considering the upheaval in the taxpayer's life her failure to file was reasonable.
Tip of the Day
Sales tax exemption . . . We've mentioned in the past that many states offer a sales tax exemption for machinery used in the production process. Generally that means equipment used for making tangible personal property. For example, saws used to cut logs into boards or a welder used in the assembly of hand trucks. But that same equipment used elsewhere probably won't be exempt. For example, Madison buys two identical arc welders. One is used on the production line to make hand trucks; the other is used in the repair shop to fix hand trucks shipped back for repair. The first would probably be exempt; the second probably not since it's not used to manufacture a product. What if a piece of equipment is used for both exempt and taxable purposes? While the rules vary, often the equipment must be used more than 50% of the time in manufacturing. Many states also exempt electricity and other energy forms used in the process. Be sure to keep good records. If you're audited for sales tax, the auditor will take a long look at your claimed exemptions. Talk to your tax adviser.
August 23, 2016
Revenue Procedure 2016-44 provides safe harbor conditions under which a management contract does not result in private business use of property financed with governmental tax-exempt bonds under Sec. 141(b) or cause the modified private business use test for property financed with qualified 501(c)(3) bonds under Sec. 145(a)(2)(B) to be met.
Revenue Procedure 2016-43 provides the monthly national average premium for qualified health plans that have a bronze level of coverage and are offered through Exchanges for taxpayers to use in determining their maximum individual shared responsibility payment under Sec. 5000A(c)(1)(B) of the Code and Sec. 1.5000A-4 of the Income Tax Regulations.
The IRS has issued proposed amendments to the regulations (REG-108792-16) that provide user fees for installment agreements. The proposed amendments affect taxpayers who wish to pay their liabilities through installment agreements. The proposed effective date for these proposed amendments to the regulations is January 1, 2017. This document also provides a notice of public hearing on these proposed amendments to the regulations.
Tip of the Day
Property transfers subject to sales tax . . . Most states that impose a sales tax have rules regarding the transfer of property outside of a purchase from a retailer. For example, you give your used truck to an old friend. The truck is valued at $4,000. In most states the transfer is subject to sales tax. On the other hand, many states have a exemption for the transfer to a relative. Had you given the truck to your daughter, tax may not have been due. Most states have an exemption for assets transferred to a corporation or partnership in exchange for an interest in the entity. You contribute a truck you own personally along with tools in exchange for all the stock of Madison Inc. Generally, that transaction is exempt from sales tax. Not infrequently, the exception is narrowly worded, so you've got to check the rules carefully. On the other hand, fewer states exempt a transaction going the other way, when the business transfers assets to the shareholders or partners. Again, check the rules. A mistake here could be costly.
August 22, 2016
In an effort to collect the taxpayer's unpaid tax liabilities, the IRS prepared a Final Notice of Intent to Levy and Your Right to a Hearing. The IRS attempted to hand-deliver the levy notice during a field call on February 11 but was deterred. Two days later the IRS initiated the mailing of the levy notice by certified mail to the taxpayer's last known address. The IRS did not generate a new levy notice dated February 13; it enclosed in the envelope the original levy notice dated February 11. The taxpayer received the levy notice on February 17 and completed Form 12153 requesting a collection due process (CDP) hearing for the tax years at issue and mailed it on either March 13 or 14. The IRS received it on March 16, which was a Monday. During the CDP hearing the taxpayer argued that the period of limitations on collection of his tax liabilities had expired. He based this contention on the assertion that he intentionally had filed his request for a CDP hearing one day late, such that he was entitled only to an “equivalent hearing,” which would not have suspended the period of limitations on collection. The IRS contended that his request for a CDP hearing was in fact timely because it was filed within 30 days of the date on which the IRS mailed him the levy notice. Before the IRS may levy against a taxpayer's property, it must provide written notice of the proposed levy and inform the taxpayer of his right to an administrative hearing. A levy notice must be sent or delivered to the taxpayer “not less than 30 days before the day of the first levy.” This notice must inform the taxpayer in simple and nontechnical terms of his right “to request a hearing during the 30-day period”. The Tax Court held when the date appearing on a levy notice is earlier than the date of mailing, the 30-day period prescribed by Section 6330(a)(2) and (3)(B) is calculated by reference to the date of mailing. The Court also held the directive that levy and lien notices should be drafted “in simple and nontechnical terms” does not require invalidation of a levy notice when there is a mismatch between the letter date and the mailing date. The Court further held that the taxpayer timely filed his request for a CDP hearing because he mailed his Form 12153 to the IRS, and it was received by the Service, within 30 days of the IRS's mailing of the levy notice. Finally the Court held the period of limitations on collection was suspended when the taxpayer timely requested a CDP hearing, and it remains suspended. Charles J. Weiss (147 T.C. No. 6)
Tip of the Day
Bond call . . . Many bonds have a call provision, that is, the issuer can redeem the bond at a stated price on or after a certain date. For example, Madison Inc. issued $10 million of 6% bonds in 2007 with a call price of $1,010 and a date of January 1, 2017. Madison can redeem the bonds anytime after January 1, 2017 by paying $1,010 for each bond. The provision is included in many bonds because the issuer (Madison in our example) may want to refinance at a lower rate, because the underlying asset is being sold, or it just has the cash and wants to pay down debt with a high interest rate. There are variations on these provisions such as several potential call dates with matching redemption prices. What's that mean to you, an investor? First make sure you know if there is a call provision and when it can take effect and at what price. You don't want to pay $1,100 for a bond that's callable in two years at $1,050 if there's a chance the issuer will redeem the bond. You might also want to know the yield to call date in addition to the yield to maturity. Buying individual bonds (rather than a mutual fund) can be tricky. Get good investment advice.
August 19, 2016
The IRS has issued final regulations (T.D. 9782) under Section 5000C relating to the 2 percent tax on payments made by the U.S. government to foreign persons pursuant to certain contracts. The regulations affect U.S. government acquiring agencies and foreign persons providing certain goods or services to the U.S. government pursuant to a contract. This document also contains final regulations under Section 6114, with respect to foreign persons claiming an exemption from the 2 percent tax under an income tax treaty.
If you meet the time abroad requirement, you may be able to exclude foreign earned income up to the annual limitation. In Eric Stephen Gerencser (T.C. Memo. 2016-151) the taxpayer was a U.S. citizen who lived and worked in Germany as a NATO contractor during the years at issue. He excluded his NATO wages, and claimed a foreign tax credit. The IRS and the Court allowed the foreign earned income exclusion, but denied the foreign tax credit, holding to do so would allow a double benefit--avoiding tax on the income and getting a tax credit. The taxpayer cited the tax treaty with Germany, but the Court noted that as a U.S. citizen he was not entitled to treaty relief.
You've got to be able to show that a business expenditure is an ordinary and necessary expense in order to secure a deduction. In Lawrence A. Tanzi et ux. (T.C. Memo. 2016-148) the taxpayer was a college professor who taught math and communication and his wife a campus librarian. The couple deducted their phone, internet, and television expenses and the cost of books, DVDs and CDs for a professional library. The taxpayer argued that as a professor he incurred expenses to improve his "general knowledge". The outlays were not a condition of their employment and that they were not ordinary and necessary.
Tip of the Day
Cash tight? . . . There's no way you can pay all five credit cards this month with the cash you've got. But four of the cards have low balances and a fifth has a very high balance. The best approach may be to make the monthly payment on the card with the highest balance and defer payment of the other cards. Why? Some issuers have the option to not only charge you a penalty, but also raise the interest rate on the card. But do your homework first. There are a number of factors to consider including the penalty for not paying, the difference in interest between what you're paying now and the penalty rate, whether this is a short- or long-term problem, etc. Read the rules on the cards and discuss the options with your financial advisor.
August 18, 2016
The IRS has again added to the list of parishes qualifying for relief as a result of the severe storms and flooding that took place beginning on August 11. The additional parishes are Avoyelles, Evangeline, Iberville, Jefferson Davis, St. Martin, St. Tammany, Washington and West Feliciana.
It's not unusual to do business through multiple entities such as one or more operating companies and a holding or management company. There can be a number of nontax reasons for doing so, but you've got to be careful. In Little Mountain Corporation (T.C. Memo. 2016-147) was a corporation that claimed to have no employees and no written contracts with any independent contractors, issued no information reports to any independent contractors, and enjoyed enormous amounts of income during the tax year in issue without paying any dividends to its shareholders. Substantial payments were made to a "consultant" during the year. The consultant was related to the shareholders of the entity. He invoiced the corporation, but asked that checks be made to "cash" and were negotiated by various individuals other than the consultant. The taxpayer provided no consulting fee schedule, hourly rate, or specific breakdown of the consultant's tasks. No written contract existed. The invoices did not detail what services were performed. The total payments for the year at issue was $896,493. The Court found the taxpayer did not provide sufficient evidence to persuade it that the expense was both ordinary and necessary, and reasonable and disallowed the deduction.
Tip of the Day
Records of gambling losses . . . You can take a deduction for gambling losses (on Schedule A) up to the amount of any winnings. But you've got to substantiate those losses. One way is statements from a casino, another is an accurate diary. In one case the Tax Court noted inconsistencies in the diary and in the statements from the casinos. The Court held that the record provided no satisfactory basis for estimating the taxpayers' gambling losses in excess of the amount allowed by the IRS. There were too many omissions and discrepancies among the documents the taxpayers presented as substantiation. Consequently, the Court did not apply the Cohan rule to estimate the amount of the taxpayer's gambling losses. The taxpayers could have avoided this result by keeping complete records of their gambling activities or perhaps by simply using their casino cards to track their slot machine play on each of their gambling trips.
August 17, 2016
The IRS has already added to the list of parishes qualifying for relief as a result of the severe storms and flooding that took place In Louisiana beginning on August 11. The additional parishes are Acadia, Ascension, East Feliciana, Iberia, Lafayette, Pointe Coupee, St. Landry and Vermilion.
The IRS has announced the Fourth Quarter Update to its 2015-2016 Priority Guidance Plan and the Initial Version of the 2016-2017 Priority Guidance Plan. You can find both at Priority Guidance Plan.
Normally, a taxpayer's net loss on rental real estate is limited to $25,000 and even that exemption phases out as his or her income increases. There's a special exception to the limitation for real estate professionals. But you've got to show that during the year you spent more than half your work time on real estate and more than 750 hours on qualifying real estate activities. Only activities in which the taxpayer materially participates counts toward the 750 hour test. The taxpayer's only employment during the years at issue was as a real estate professional so she easily met the first test. The second test was tougher, particularly since the taxpayer failed to elect to group her rental properties so participation on the properties would be aggregated. While the taxpayer kept no contemporaneous record of her time spent on each property, the Court found she testified credibly as to the time and substantial amount of money devoted to each property. The Court used the "facts and circumstances" test to show she materially participated in each property, but cautioned the taxpayer to construct contemporaneous time logs in the future. Beth Hailstock (T.C. Memo. 2016-146)
Tip of the Day
Buying a property rent? . . . While economic considerations come first, you should be aware that until the property is rented you may not be able to deduct expenses associated with the property. If the property needs work before it's ready for rent, you should try and get it available in rentable condition as soon as possible. Fortunately, that also makes sense from a business standpoint.
August 16, 2016
The IRS has added the Texas counties of Hall, Hardin, Navarro, and Throckmorton to the list eligible for assistance as a result of severe storms and flooding published in a June 11, 2016 notice. Taxpayers sustaining losses may deduct them on their 2015 or 2016 return.
If you're going to court seeking a refund you generally must have paid your taxes in full. In Philip A Duggan (U.S. District Court, E.D. Washington) the taxpayer argued he was not requesting a refund but an abatement of the penalties assessed. Thus, the "full payment" rule should not apply. The Court failed to agree, noting only the IRS can abate a penalty under Sec. 6404. The Court also noted the taxpayer had failed to fully pay his tax liability. The penalties assessed were also considered taxes for the full payment rule.
Tip of the Day
Basis for amortization/depreciation deductions . . . Before taking an amortization or depreciation deduction, you've got to be able to show you've got a basis in the asset. For example, you may be able to amortize start-up expenses, developed intangibles, etc. or physical assets such as purchased or constructed equipment or buildings. If you purchased the asset you've got a receipt or bill of sale. But what if you self-constructed it? The IRS will not just accept that you expended $20,000 in constructing a special machine to use in your business. You've got to have receipts and canceled checks and show that you didn't deduct those expenditures elsewhere. If you had your own employees working on the project you want to be able to reconcile total payroll with currently deducted and capitalized expenditures. The amounts involved can be substantial and may not be challenged immediately. For example, you used in-house labor to construct a building. Seven years later the IRS challenges your depreciation deduction. Do you still have the documentation to prove your basis?
Copyright 2016 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536