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April 24, 2015
The rental of real property is generally a passive activity that produces passive losses and passive income. Passive income can be offset by passive losses. But not all rental activity income is passive. One exception is a self-rental, that is where a taxpayer rents property for use in a trade or business in which the taxpayer materially participates. For example, you own a warehouse that you rent to your S corporation (or LLC) in which you materially participate. The rental results in net income. The income is not passive and can't be used to offset passive losses. In Larry Williams et ux. (T.C. Memo. 2015-76) the real property was owned by an S corporation (in which the taxpayers were the sole shareholders) and rented to another entity, a C corporation, in which the taxpayer materially participated. The taxpayers argued that Sec. 469 does not, on its face, apply to S corporations. They also argued that Reg. Sec. 1.469-2(f)(6) does not apply since the lessor did not materially participate in the trade or business of the lessee. The Court noted that while it was true that Sec. 469 does not specifically refer to S corporations, since an S corporation is a passthrough entity and does not pay tax, it is the individual shareholders of the corporation that pays the tax. Thus, the law is applicable to an S corporation. The Court dismissed the second argument in that it could find no authority in the plain language of the regulations to support the taxpayers' argument containing lessor-lessee.
Tip of the Day
Are you a premium tenant? . . . Some tenants in shopping or strip centers can draw a disproportionate amount of traffic. That's good news for center owners and other tenants. But it could be good news for you too if you're a premium tenant. You may be able to negotiate a lower rent. You'll have the most clout when your lease is coming up for renewal. If you're looking for new space, make that pitch to your potential landlord.
April 23, 2015
The IRS is reminding (IR-2015-72) businesses and tax-exempt organizations that they have until April 30, 2015 to request certification for those workers hired in 2014 that qualify for the work opportunity tax credit (WOTC). Newly revised Form 8550 is used by employers to request certification. More information is available in Notice 2015-13.
The president has determined that as a result of a severe winter storm, snowstorm, and flooding from January 26 to 28, 2015, taxpayers in the affected areas of Massachusetts may deduct the losses on their 2014 returns. The affected counties include Barnstable, Bristol, Dukes, Essex, Middlesex, Natucket, Norfolk, Plymouth, Suffolk, and Worcester.
In Dan E. Butts et ux. (T.C. Memo. 2015-74) the taxpayers did not timely file returns for 2007 and 2008. The IRS issued a notice of deficiency to each taxpayer for 2008 and to the taxpayer-husband for 2007. the taxpayer jointly petitioned the Court with respect to those three notices of deficiency. After the taxpayers filed their joint petition, the IRS issued a notice of deficiency to the taxpayer-wife for her 2007 tax year, and she then filed a separate petition with respect to that notice of deficiency. Thereafter, the taxpayers filed joint income tax returns for 2007 and 2008, claiming on the 2007 return an overpayment attributable to tax withholding by the wife's employer from her 2007 wages. The parties have stipulated an overpayment for 2007 but dispute whether the taxpayers are entitled to a refund of that overpayment. The Court held that Sec. 6512(b)(3) requires the application in the instant case of the two-year lookback period in Sec. 6511(b)(2)(B). The Court also held it lacked jurisdiction under Sec. 6511 and 6512 to order a refund of the 2007 overpayment because no portion of it was paid with the applicable lookback period.
Tip of the Day
Labor market getting tighter? . . . It is in some areas and for some professions. Review your near-term future requirements. If you'll need to fill an important slot or one requiring special skills, you should plan ahead.
April 22, 2015
Section 5000C, imposes on any foreign person that receives a specified Federal procurement payment a tax equal to 2 percent of the amount of the payment. Section 5000C(b) defines a specified Federal procurement payment as any payment made to a foreign person pursuant to a procurement contract with the U.S. government entered into on and after January 2, 2011, to provide goods or services if the goods are manufactured or produced in, or the services are provided in, any country that is not a party to an international procurement agreement with the United States. Notice 2015-35 (IRB 2015-18) provides a list of qualified income tax treaties that exempt all nationals of that country from the tax imposed under Section 5000C.
In Clarence William Speer et ux. (144 T.C. No. 14) the taxpayer was a retired Los Angeles Police Department detective, failed to report as gross income payments that, on his retirement, he received from the department cashing out his unused vacation time and sick leave (leave payments). The taxpayers argued that some portions of his unused vacation time and sick leave accrued when he was on temporary disability leave from the department pursuant to sec. 4.177 of the Los Angeles Administrative Code, which in part provides that a temporarily disabled member of the Police Department shall receive as temporary disability compensation an amount equal to his base salary. The taxpayers argued that at least some portions of the leave payments are excludable from gross income under Sec. 104(a)(1) as amounts received under a workmen's compensation act as compensation for personal injuries or sickness. The Court held that the leave payments were not received under a workmen's compensation act as compensation for personal injuries or sickness and, therefore, no portion was excludable.
Tip of the Day
Closing your business? . . . Or discontinuing an operation? Even if your venture produced only losses and there are no physical assets left, you still may have intangible assets that can bring some money. For example, you might have a name that's known locally, regionally, or even nationally. How much it's worth will depend on a number of factors. You should consider getting the name trademarked before attempting to sell it. Another frequently encountered intangible is your customer list. That list can be extremely valuable. In a competitive environment recommending another supplier or service provider can generate real income. Depending on your business, there may be other intangibles. A restaurant might be able to sell certain special recipes, etc. Talk to your accountant, business adviser or attorney.
April 21, 2015
As a result of a severe winter storm and snowstorm from January 26 to 28, 2015 (FEMA-4212-DR) the president has declared certain counties in Rhode Island disaster areas and affected taxpayers may deduct losses sustained from the disaster on their 2014 return. The counties include Bristol, Kent, Newport, Providence and Washington.
You can have your debts discharged in bankruptcy, but you've got to meet certain requirements. In the case of Federal tax debts, you must have filed a return that meets the definition of a return under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The law defines return as a return that satisfies the requires of applicable nonbankruptcy law (including applicable filing requirements). A return prepared by the IRS, a "substitute for return" under Sec. 6020, isn't included in that definition. In In re: James Robert Biggers et al. (U.S. Bankruptcy Court, M.D. Tennessee) the Court found that the debtors' late filed returns (after the IRS had generated substitute returns) for three of the years all reported a lower liability than the amount originally assessed by the IRS, and therefore, served no purpose and the associated tax debts were not dischargeable.
Tip of the Day
Putting off asset replacements? . . . Taxes are only a part of the analysis. Most small businesses can expense a significant amount. While the law is currently back to $25,000 under the Sec. 179 expense option, no one doubts that a higher level will be reinstated for 2015 (it was $500,000 in 2014). From a business standpoint, now might be a good time to replace old, worn-out property. And, no matter how tight cash is, there comes a time when replacement is required. That's when the efficiency of the machine has declined beyond a certain point and downtime and repair costs are rising rapidly. Many businesses are starting to buy replacement equipment and that's likely to accelerate. Buying now might make sense, particularly if you've got to finance the purchase. But you should have a good idea of where your sales and your business are headed in the near future. Ideally, you'd like to anticipate demand to be ready and get a jump on your competition, but you don't want to invest in equipment that will lay idle.
April 20, 2015
The House has passed a bill that would permanently repeal the estate and generation-skipping transfer tax (GST). The bill will most likely pass the Senate, but President Obama has said he would veto the measure.
Tip of the Day
Negotiate the easy stuff first . . . Often negotiations on a deal break down over items that shouldn't be deal breakers. Try avoiding those issues until later. There are probably a number of points where both parties (if they're willing to do a deal) can agree. If you can negotiate through the smaller points both sides might see there's room for compromise on the other issues and might see it'd be foolish to abandon the deal because there isn't much separating them. Before taking that approach make sure there are no issues where neither side will budge. For example, you need seller financing to pay at least 40% of the purchase price for the business and the seller has to have all cash because of other commitments. Unless you can overcome that obstacle, the deal might be a non starter.
April 17, 2015
In pass-through entities (partnerships, LLCs, S corporations) as in a sole proprietorship, the liability for state income taxes generally falls on the partner, member, etc. In Matthew L. Cutler et ux. (T.C. Memo. 2015-73) the taxpayer was a member in a partnership that did business in several states. Even though the taxpayer did not work in most of the states, he had to pay his nonresident share of state taxes there based on his share of the partnership income. The taxpayer deducted the state taxes he paid as unremimbursed partnership expenses on Schedule E. The Court held the taxes were not imposed on the partnership but on the partners and could only be deducted as an itemized deduction on Schedule A of Form 1040.
Many taxpayers take a deduction for clothing, furniture, appliances, given to charitable organizations. Tax preparers often see the contribution described as "4 bags of clothing" along with an unsigned and undated receipt from the charity. That isn't nearly enough to satisfy the IRS requirements. In Kenneth James Kunkel et ux. (T.C. Memo. 2015-71) the IRS challenged the taxpayer's deduction of some $37,000 for clothing, books, toys, jewelry, etc. The taxpayers mistaken thought that contributions of less than $250 did not need a receipt from the charity. The Court found that the "doorknob hangers" provided as receipts by the truck drivers from two organizations clearly failed to satisfy the substantiation requirements. They were undated, not specific as to the taxpayers, did not describe the property contributed and contained none of the other required information. The Court noted that for noncash contributions in excess of $500 a taxpayer was show additional information such as the date the item was acquired and the manner of acquisition as well as the cost of the property. Since the taxpayer claimed donations of clothing and books each in amounts greater than $5,000, an appraisal was required. The Court disallowed all their noncash charitable contributions and imposed an accuracy-related penalty.
Tip of the Day
Robbing future revenue . . . Sometimes the urge to show higher sales every quarter or year gets out of hand. Having a big push at the end of a month or quarter often means you're just taking sales from the next period. Sometimes that's OK. For example, when you need a short-term boost in cashflow. But it usually doesn't work over the long term. The approach can have a negative effect on employee morale. In some cases it can depress profits by having salesmen offer special deals just to get the sales numbers. If you're planning on using such a technique, think it through first.
April 16, 2015
That Form 1098 you receive from the bank for your mortgage interest is important documentation for taking a mortgage interest deduction. While it's not necessary in order to secure a deduction, it'll make things much easier. In Saad Al-Soufi and Samia Schreitah (T.C. Memo. 2015-68) the IRS challenged the taxpayers' mortgage interest deduction on a home in Syria. The taxpayer was unable to prove he lived in the property or that he rented it out. He could not show he paid interest on a mortgage. The Court did not allow a letter from the mortgage company to be introduced because it did not bear the indicia of trustworthiness. The timing of the letter was suspect as the taxpayer requested it two months after receiving the deficiency notice from the IRS, the amount of the interest was specified in dollars rather than Syrian pounds, and the amount was exactly equal to the amount the taxpayer computer from his amortization schedule, down to the penny. The Court denied the deduction.
Tip of the Day
Don't overreact . . . One of the advantages of a small business is that it can react quickly to change. But there's also a danger of overreacting. Unless the situation requires immediate action--a fire, explosion, chemical spill (and there should be a plan in place for those)--take the time to evaluate the situation. If there are personal issues involved (e.g., you get a chance to eliminate a bitter rival) get an independent opinion. You should have one or more people you can rely on to give you a second opinion with a different insight. More often than not that could be your CPA or attorney for a small business, or your controller, etc. if you have one. You want to move quickly, but not without analysis.
April 15, 2015
Notice 2015-33 (IRB 2015-18) provides adjusted limitations on housing expenses for tax year 2015 for purposes of the foreign earned income exclusion and foreign housing exclusion.
You may be able to recover your litigation costs from the IRS if you are the prevailing party in a dispute, even if you don't go to court to fight the IRS. But that's not the only test you have to pass. In Chad R. Baldwin (T.C. Memo. 2015-66) the taxpayer was the prevailing party but the Court found the IRS's position was substantially justified because it was more than three years after the notice of deficiency was issued that the taxpayer submitted all of the relevant documentation to the IRS to prove his claims. The Court denied the taxpayer's claim for his costs.
Tip of the Day
Chasing a deal . . . If you're buying a building, looking to acquire a business, bidding on a contract, etc. work up your best numbers (and options) first. Maybe add a little more if there are other, intangibles to consider. Then go that far and no further. When you start chasing a deal you run the risk you'll pay more than you can afford or you'll find the deal no longer provides your required return. There's a building for sale that, with a little work, would be perfect for your business. There are other properties that fit your requirements, but the location gives it an edge. Based on your numbers it's worth $1.5 million. The asking price was $1.6, but other potential buyers have bid it up to $1.95. If you bid slightly more, you could get the property, but it would leave you with almost no cash reserves. Walking away would probably be the smart move. The higher debt service could impact your operations.
April 14, 2015
The president has determined that, as a result of a severe winter storm and snowstorm on January 26-28, 2015 (FEMA-4209-DR) taxpayers in New Hampshire who sustained losses in the counties of Hillsborough, Rockingham, and Strafford can deduct the losses on their 2014 return.
As a result of a severe winter storm and flooding from February 15 to 22, 2015 (FEMA-4211-DR) the president has declared certain counties in Tennessee disaster areas and affected taxpayers may deduct losses sustained from the disaster on their 2014 return. The counties include Anderson, Bedford, Bledsoe, Blount, Campbell, Clay, Coffee, Cumberland, Fentress, Giles, Grainger, Grundy, Hamblen, Hancock, Hardeman, Jefferson, Knox, Lawrence, Loudon, Marshall, McMinn, McNairy, Meigs, Monroe, Moore, Morgan, Obion, Overton, Putnam, Roane, Scott, Sevier, Van Buren, Warren and White.
Gifts of no more than $14,000 annually (2015 amount; indexed for inflation) can be made to any individual without gift tax consequences. But this annual exclusion is only available for gifts of a "present interest". In order for the gift to be one of a present interest the donee must be able to have an unrestricted right to the property. In Israel Mikel et ux. (T.C. Memo. 2015-64) the taxpayers made a number of gifts of $12,000 (the maximum exclusion in effect at that time) to a trust for the beneficiaries. The instrument was a demand trust (often called a Crummey trust) that contained a provision that the beneficiaries had a option to withdraw their gift during a specified time after receiving notice from the trustees that an addition had been made to the trust. The IRS argued that the ability to withdraw funds was illusory because a provision would result in adverse consequences to a beneficiary who attempted to withdraw property. The Court did not agree and gave summary judgment to the taxpayers. The Court found the provision was enforceable and would not deter beneficiaries from pursuing judicial relief to secure their property share.
Tip of the Day
Qualified dividends . . . They escape tax if you're in the 10% or 15% bracket and are taxed at only 15% if you're in a higher bracket. Most dividends from U.S. companies are qualifying dividends; some dividends from foreign corporations are too. To be sure, rely on the information on the 1099-DIV (or the information on your brokerage statement) you received. But in addition to the source of the dividend, there's also a holding period requirement. You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. Different rules apply to preferred stock and stock where you had an option to sell, were the writer of an option to buy, or had a position in substantially similar property.
April 13, 2015
Notice 2015-30 (IRB 2015-17) provides limited penalty relief for taxpayers who received a Form 1095-A, Health Insurance Marketplace Statement, that was incorrect or delayed and who timely filed their 2014 income tax return, including extensions.
The IRS is reminding (IR-2015-70) U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2014, that they may have a U.S. tax liability and a filing requirement in 2015. A filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the foreign earned income exclusion or the foreign tax credit , that substantially reduce or eliminate their U.S. tax liability. These tax benefits are not automatic and are only available if an eligible taxpayer files a U.S. income tax return. The filing deadline is Monday, June 15, 2015, for U.S. citizens and resident aliens whose tax home and abode are outside the United States and Puerto Rico, and for those serving in the military outside the U.S. and Puerto Rico, on the regular due date of their tax return. To use this automatic two-month extension, taxpayers must attach a statement to their return explaining which of these two situations applies.
As a result of a severe winter storm, snowstorm and flooding from January 26-28, 2015 certain areas of Maine are eligible for disaster relief (FEMA-4208-DR). Taxpayers in the counties of Androscoggin, Cumberland and York who sustained losses may deduct them on their 2014 return.
The president has determined that, as a result of severe winter storm, flooding, landslides and mudslides from March 3 through 6, 2015 (FEMA-4210-DR) in West Virginia taxpayers who sustained losses related to the disaster in the counties of Barbour, Boone, Braxton, Cabell, Doddridge, Gilmer, Harrison, Jackson, Kanawha, Lewis, Lincoln, Logan, Marshall, McDowell, Mingo, Monongalia, Putnam, Raleigh, Ritchie, Roane, Summers, Tyler, Upshur, Wayne, Webster, Wetzel, Wirt, Wood, and Wyoming may deduct them on their 2014 return.
Tip of the Day
Can't pay? . . . Even if you can't pay what you owe with your return or extension, file! Pay what you can with the return or extension to reduce any penalties and interest. Consider paying by credit card. It may not be the most cost efficient, but at least you won't be worrying about the IRS. There's generally a $2.79 debit card flat fee or a 1.87% (some higher) fee to use a credit card. There are a number of companies that provide the service. Go to the IRS at www.irs.gov/uac/Pay-Taxes-by-Credit-or-Debit-Card. You may also be able to get an installment agreement. The same general rule to file a return or extension request even if you can't pay applies to most states. Payment options vary. Check the state instructions for your return.
April 10, 2015
The IRS has announced (IR-2015-68) that most taxpayers have already filed their 2014 returns. As of April 3 (latest available stats), the IRS had already received just over 99 million returns and issued more than 77 million refunds averaging over $2,800. That means more than 2/3 of taxpayers have already filed. U.S. citizens and resident aliens who live and work abroad, as well as members of the military on duty outside the U.S., have until June 15 to file. Tax payments are still due April 15. Members of the military and others serving in Afghanistan or other combat zone localities. Typically, taxpayers can wait until at least 180 days after they leave the combat zone to file returns and pay any taxes due. Individuals in the U.S. affected by certain natural disasters may have additional time to file.
The Treasury Inspector General for Tax Administration (TIGTA) did an audit to follow up on concerns raised in a prior audit that the IRS was not providing quality customer service to identity theft victims. TIGTA found that identity theft victims experienced long delays in resolving their tax accounts in Fiscal Year 2013. Our review of a statistically valid sample of 100 identity theft tax accounts resolved in the Accounts Management function between October 1, 2012, and September 30, 2013, identified that the IRS took an average 278 days to resolve the tax accounts. In addition, our review continues to identify errors made on the tax accounts of victims of identity theft. For example, of the 100 tax accounts that TIGTA reviewed, the IRS did not correctly resolve 17 (17 percent) accounts. Based on the results of our sample of 100 identity theft tax accounts resolved during the period October 1, 2012, to September 30, 2013, TIGTA estimates that of the 267,692 taxpayers whose accounts were resolved, 25,565 (10 percent) may have been incorrectly resolved, resulting in the delay of refunds or the victim receiving an incorrect refund amount. For the complete report go to www.treas.gov/tigta/auditreports/2015reports/201540024fr.html.
Tip of the Day
Down to the wire . . . Yes, you've still got the weekend (plus a couple of days) to finish your return, but unless you've got most of your info together and it's just a question of entering the data, you might want to consider plan B--an extension. The worst thing you can do is rush through the return, particularly if you've got a Schedule C, rental properties with multiple expenses, etc. Yes, you can file an amended return if you miss something, but if you're like most people, after e-filing (or mailing) the return, you'll put away the files and won't look at it again. Filing an extension doesn't increase your audit chances. But remember, you'll have to estimate what you owe and pay that amount with the extension request. That applies to both federal and state returns.
April 9, 2015
The IRS has released statistics and it's IRS Criminal Investigation Fiscal Year 2014 National Operations Annual Report. The Service reported that it initiated 4,297 investigations in fiscal year 2014, down from 5,314 in the prior year. It recommended 3,478 prosecutions (down from 4,364) that resulted in 3,268 individuals sentenced to prison (down from 2812). The conviction rate for fiscal year 2014 was 93.4%, slightly more than 2013.
Tip of the Day
Nursing home as medical expenses . . . You can deduct as medical expenses the cost of medical care in a nursing home, home for the aged, or similar institution, for you, your spouse or dependents. This includes the cost of meals and lodging in the home if a principal reason for being there is for medical care. If the reason for being in the home is personal, you can't include the cost of meals and lodging, but you can deduct the part of the cost that is for medical or nursing care.
April 8, 2015
The Tax Court can find the IRS abused its discretion in cases involving offers in compromise, installment agreements, etc. and overturn the Service's holding. In Kevin R. Gurule et ux. (T.C. Memo. 2015-61) the taxpayers petitioned the Court when the IRS denied their offers in compromise and installment offers. The taxpayers had several loans on their 401(k) plan, a house in foreclosure and the wife and one son suffered from severe medical conditions. The Court noted that there were some discrepancies in the record and the record did not show that the Settlement Officer ever considered, much less made a determination about, the taxpayers' economic hardship claim. On the record before the Court, it held that it could not determine whether the IRS abused its discretion. The Court remanded the case to the Appeals Office for further consideration and clarification.
Tip of the Day
Interactive help . . . Need help in finding out if you're entitled to claim the Premium Tax Credit? Or have to make an Individual Shared Responsibility Payment for not having health coverage? Or if you're able to deduct mortgage-related expenses? You can find interactive help on the IRS Web site at Interactive Tax Assistant.
April 7, 2015
In Lana Joan Davidson (144 T.C. No. 13) the taxpayer petitioned the Court under Sec. 6015(e)(1) (innocent spouse relief) to review the IRS's final determination denying he relief from joint liability. this type of action is known as a "stand alone" case because the only issue is whether the taxpayer is entitled to relief from joint liability. The taxpayer then moved the Court to allow her to withdraw the petition and to dismiss the case. The Court held it has discretion to allow the taxpayer to withdraw the petition because the petition did not invoke the Court's jurisdiction to redetermine a deficiency or otherwise implicate a provision such as Sec. 7459(d) that requires the Court to enter a decision upon the dismissal of a case. Wagner followed. Vetrano was distinguished because the petition in that case invoke the Court's jurisdiction under Sec. 6213 to redetermine a deficiency and required that the Court enter a decision. The Court ordered the petition withdrawn and the case dismissed.
Tip of the Day
Amended returns . . . Realized you made a mistake on the return you just filed? Generally, all is not lost. You can file an amended return using Form 1040X. You must have already filed a 1040, 1040A, etc. There are some elections that can only be made on an original return, so check the rules. But you only have three years to file an amended return and that means time is running out for a 2011 return filed on or before April 15th, 2012. (If you had an extension, the actual filing generally starts the clock.) If you did you return by computer, doing a Form 1040X should be easy. Remember to give a clear explanation of why you're filing an amended return in Part III. Don't hesitate to create a schedule and attach it if that makes it clearer. However, don't attach a copy of your original return unless required to do so.
April 6, 2015
You may be responsible for a debt even if you've transferred the accompanying asset. The responsibility for a debt can be passed to the shareholders of a corporation. While the facts were more involved, that was basically the issue in William Scott Stuart, Jr., Transferee, et al. (144 T.C. No. 12). The C corporation's shareholders sold their shares to a third party who had promised to pay the corporation's tax liability that arose from a sale of all the corporation's assets. The third party did not pay and the IRS sought to recover the income taxes from the shareholders under a doctrine of transferee liability. The Tax Court rejected the IRS's two-step analysis (following Swords Trust), but held that transferee liability was established under state (Nebraska) Uniform Fraudulent Transfer Act (UFTA) because the corporation's transfer was constructively fraudulent as to the IRS and the transfer was made for the benefit of the petitioners. The Court also held that the unmatured tax liabilities were "claims" within the meaning of that term as defined in UFTA and also held that the petitioners, for whose benefit the transfer was made, are transferees within the meaning of Sec. 6901.
Tip of the Day
Home stretch . . . Unless your return is very simple, if you haven't got your information together, there isn't much time left. Dropping your records on your tax preparer the last week is poor form. For many preparers who have small business clients and taxpayers with rental properties, this has been a more trying season than usual. If you're in that boat, you may want to consider an extension. But whether or not you file an extension, any remaining tax liability must be paid by April 15th or risk a penalty. That means you'll need a good idea of your final liability and that means you or your tax preparer will still have to do some work.
April 3, 2015
Revenue Procedure 2015-28 (IRB 2015-16) contains modifications to Revenue Procedure 2013-12. The modifications reflected in this revenue procedure include new safe harbor EPCRS correction methods relating to automatic contribution features (including automatic enrollment and automatic escalation of elective deferrals) in plans described in Sec. 401(k) and Sec. 403(b); and special safe harbor correction methods established for plans (including those with automatic contribution features) that have failures that are of limited duration involving elective deferrals.
The president has signed the Slain Officer Family Support Act of 2015. It allows taxpayers to deduct contributions to the families of slain NYPD detectives Wenjian Liu and Rafael Ramosa made between January 1, 2015 and April 15, 2015 on their 2014 tax return.
In Jose A. Lamas et ux. (T.C. Memo. 2015-59) the taxpayer was able to show that his two real estate businesses were not passive activities. The taxpayer showed that the businesses were a single activity because both were involved in commercial and residential real estate development. The taxpayer spent considerable time in promoting the businesses and in the day-to-day management of the enterprises. The work was that customarily done by owners and not investors. While the taxpayer did not have a contemporaneous log of his time spent, a number of witnesses testified as to the work he performed and other evidence such as phone logs existed. The Court also found that it was proper to group the activities because they were under common control, were in related businesses, worked out of the same offices and there were transactions between the two businesses. The Court held the taxpayer materially participated in the businesses.
Tip of the Day
Casualty losses . . . If a single casualty results in multiple losses, e.g., a garage fire destroys your classic car, some tools, and your daughter's birthday presents, you must figure each loss separately. That can make a big difference since the loss on items that have appreciated in value (e.g., the classic car) is limited to the smaller of your cost or the decrease in fair market value. The rules are different for real property. You can treat the entire property including the house, landscaping, additions, etc. as one item of property. Caution. More than a few of the rules are different for business property.
April 2, 2015
The IRS has issued final regulations (T.D. 9715) regarding the agent for an affiliated group of corporations that files a consolidated return (consolidated group). The final regulations provide guidance concerning the identity and authority of the agent for a consolidated group.
Employers can appoint or enter into an agreement with a third party to take over some or all of the employer’s Federal employment tax withholding, tax return preparation, reporting, and tax payment responsibilities. Approximately 40 percent of small firms use a third-party payer for tasks ranging from paying employees to Federal employment taxes. There are four common types of third-party payer arrangements: Payroll Service Provider (PSP), Reporting Agent, Section 3504 Agent, and Professional Employer Organization (PEO). Third-party payer arrangements usually work as intended; however, there have been instances in which third-party payers receive funds from employers for payment of payroll taxes, but they have not remitted those taxes to the IRS. This causes significant problems for employers because the funds have been expended but the taxes are still due. In an audit TIGTA (Treasury Inspector General for Tax Administration) evaluated whether controls are adequate to protect the taxpayer’s and Government’s interests when third-party payroll providers are not compliant with payment and filing requirements. TIGTA found that processes still have not been established to link employers with all third-party payers. Of the four most common types of third-party payer arrangements, only Reporting Agents and Section 3504 Agents are required to submit an authorization form that discloses the relationship between an employer and a third-party payer. The IRS does not require a similar authorization for employers that use a PSP or a PEO. The inability of the IRS to identify employers that use the services of a PEO is a concern TIGTA raised in prior reports. TIGTA recommended that the IRS partner with the Bureau of the Fiscal Service to develop a plan to use the Electronic Federal Tax Payment System® to link a PSP with an employer; establish a program in which employers can inform the IRS of the PEOs they authorize to file and pay employment taxes; require those PEOs with a service agreement to attach a Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, to employment tax returns; and, develop processes and procedures to ensure authorization information and Section 3504 Agent indicators are accurate. You can find the complete audit at www.treas.gov/tigta/auditreports/2015reports/201540023fr.html.
When you set up an entity to do business (or, in the case of a trust, for other purposes) failure to keep transactions at arm's length or commingling funds can have serious consequences. In Minchem International, Inc., Jerry J. Sun and Sun Nam Sun (T.C. Memo. 2015-56) a foreign investor was providing funds to invest. The amounts were paid to Minchem, a corporation, but the amounts were transferred to Sun, the CEO and shareholder of Minchem. The Court noted that Minchem did not retain sufficient dominion and control over the funds transferred by the investor to make it the recipient of the income for tax purposes. The Court found that Minchem acted as a conduit for the money to Sun. In addition, while the transfers alone didn't indicate the money was income to Sun, but a taxpayer misappropriates funds (and thus has income from that action) because he used it for personal purposes, paying personal expenses of some $4.1 million for one of the years and $1.8 million for another. (The personal purposes were the purchase of an auto, a home automation system, and gambling.) The Court held the amounts received from the investor that were spent on personal purposes were gross income to Sun. The Court found other amounts were income because Sun did not honor the intended investment strategy or treat the money as subject to any use restrictions.
Tip of the Day
Phone scams . . . The IRS is again warning taxpayers about phone scams where someone calls claiming to be from the IRS and demanding unpaid taxes. Don't be fooled by the tricks scammers use to take advantage of those they target. Scammers use fake names, provide bogus IRS badge numbers and alter caller ID numbers to make it look like the IRS is calling. As the filing season nears its end, there has been a surge of phone scams where scam artists threaten police arrest, deportation, license revocation and other threats. They often leave “urgent” callback requests and sometimes prey on the most vulnerable people, such as the elderly, newly arrived immigrants and those whose first language is not English. Scammers have been known to impersonate agents from IRS Criminal Investigation as well. Keep in mind that the IRS's first contact with a taxpayer is by mail. Be advised, the scammers are very convincing.
April 1, 2015
Revenue Procedure 2015-26 (IRB 2015-15) provides instructions for all communications relating to the identification of the agent to act on behalf of the consolidated group. In general, the corporation that is the common parent of a consolidated group for a consolidated return year is the sole agent with regard to the group’s income tax liability.
The IRS has issued final regulations (T.D. 9716) with respect to the restriction on compensation to covered employees of any publicly held corporation to the extent the compensation for the taxable year exceeds $1 million.
The IRS has issued final regulations (T.D. 9718) relating to the exception to the general three-year period of limitations on assessment under Sec. 6501(c)(10) for listed transactions that a taxpayer failed to disclose as required under Sec. 6011.
During Processing Year 2013, corporate filers claimed general business credits totaling more than $93 billion. The Treasury Inspector General for Tax Administration (TIGTA) performed a review to determine whether the IRS’s controls are adequate to identify questionable general business credits claimed on business tax returns. TIGTA identified 3,285 electronically filed Forms 1120, U.S. Corporation Income Tax Return,filed in Processing Year 2013 on which corporations claimed potentially erroneous carryforward credits totaling more than $2.7 billion. TIGTA also found that a programming error caused some corporations to not receive general business credits they claimed. TIGTA identified 717 Processing Year 2013 corporate tax returns for which taxpayers did not receive more than $170 million in Empowerment Zone Employment Credits they claimed. Finally, TIGTA identified 1,411 corporate tax returns filed in Processing Years 2012 and 2013 that erroneously claimed a current year general business credit as an Eligible Small Business subsequent to the expiration of the relevant tax provision. These businesses claimed almost $35 million in general business credits as an Eligible Small Business. To see the complete audit go to www.treas.gov/tigta/auditreports/2015reports/201540012fr.html.
Books and tax return don't agree? In Jerry A. Sawyer et ux. (T.C. Memo. 2015-55) that's what the IRS revenue agent found. That prompted the agent to review the bank records and reconstruct the taxpayer's income using the bank deposits method. The agent also reviewed invoices and found that amounts received did not agree with the bank deposits. The taxpayer's recordkeeping was spotty and his method of depositing customer payments haphazard. The agent concluded that amounts on the invoices represented separate items of income. The IRS claimed the taxpayer's gross receipts were underreported by $285,975 for 2008. The taxpayers were able to show that some of the amounts the IRS claimed were unreported were actually reported on the return and the Court found that they only underreported their income by $174,506. The Court agreed with the IRS disallowance of some deductions. The Court also held that the burden had not shifted to the IRS.
Tip of the Day
Rebates generally not taxable . . . Rebates on purchases are generally not taxable for individuals. For example, getting a $50 check for the purchase of a new TV. But you must reduce your basis in the property by the amount of the rebate. For example, you purchase a new car and get a $4,000 rebate in the form of a check from the manufacturer. You use the 40 percent for business and use the actual cost method. You've got to reduce the cost of the car by the amount of the rebate when arriving at your cost for depreciation purposes. If the rebate is on business purchases, you've got to reduce the deduction you take for a deductible item or your basis for a depreciable item. In some situations special rules apply.
March 31, 2015
Rev. Proc. 2015-27 (IRB 2015-16) improves and updates the Employee Plans Compliance Resolution System (EPCRS) by making limited modifications and clarifications to Rev. Proc. 2013-12. (EPCRS sets forth a comprehensive system of correction programs for sponsors of retirement plans that are intended to satisfy the requirements of Secs. 401(a), 403(a), 403(b), 408(k) or 408(p) but that have failed to meet those requirements for a period of time. EPCRS permits plan sponsors to correct failures and thereby continue to provide employees with retirement benefits on a tax-favored basis.
The IRS usually wins in hobby loss cases, but not this time. In Henry J. Metz (T.C. Memo. 2015-54) the taxpayers bred Arabian horses and had substantial losses for a number of years. The Court found the taxpayers kept records in a businesslike manner, hired a CPA to prepare monthly profit-and-loss statements (among other work), and sorted out any business withdrawals for personal purposes and had the taxpayer repay them. They also hired a law firm to prepare sales contracts for horse and semen sales. They had annual written business plans which took in a range of the operations of the farm. They had extensive advertising and promotion materials and used the industry's best website builder to construct their site. The IRS claimed that failure to track expenses on a horse-by-horse basis. The Court dismissed that claim, noting the taxpayers' records were far more organized that others the Court has found adequate. They changed operating methods and adopted new techniques to stem their losses. The taxpayer sought professional advice in all areas of their operation. They both participated in the activity on a full-time basis. The Court found the taxpayers were engaged in their horse-breeding activity with a profit objective and allowed the losses.
If you do business as an S corporation paying too little salary to shareholder/employees can result in IRS scrutiny. For a C corporation, it's the exact opposite. The portion of the salary the IRS deems excessive can be nondeductible to the corporation but taxable to the shareholder as a dividend. In Midwest Eye Center, S.C. (T.C. Memo. 2015-53) the sole shareholder of the corporation was also an eye surgeon. The practice had other surgeons but during the time at issue one surgeon left and another reduced her workload. For 2007 the shareholder/employee received a salary of $780,000 and bonus of $2 million. For 2008 the amounts were $690,000 and $1.1 million. The taxpayer produced no study showing comparable salaries, and no explanation of how the amount of the bonus was determined. The Court found a portion of the salary and bonus was unreasonable.
Tip of the Day
Refinancing a rental or business property? . . . If you refinance your personal residence with a loan larger than the outstanding principal on the existing mortgage, interest on the excess is generally not deductible. There are some exceptions--if the money is used to improve the residence or it qualifies as a home equity loan ($100,000 or less). With rental or business property the same rules generally apply, but the home equity exception isn't available. Refinance for more than the existing loan and the interest on the excess is not deductible unless the excess funds are used to improve the property. For a business, the interest is deductible if the excess funds are used by the business. However, in both cases, if the funds are diverted to personal use, the interest isn't deductible.
March 30, 2015
If it sounds too good to be true, it probably is. You may be selling for your business for a substantial gain, but there aren't many ways to avoid tax on that gain. In CNT Investors, LLC, Charles C. Carroll, Tax Matters Partner (144 T.C. No. 11) the taxpayer and his wife and related individuals owned appreciated real estate through an S corporation. The taxpayer and the related individuals engaged in a Son-of-BOSS transaction to create outside basis in a purported partnership to which the corporation contributed the appreciated real estate. A series of further transactions left the taxpayer and the related individuals holding the real estate through the partnership. No part reported recognizing any of the real estate's built-in gain. For the year at issue, the IRS determined that the partnership was a sham and adjusted to zero the partnership's reported losses, deductions, distributions, capital contributions, and outside basis. The Tax Matters Partner conceded that the partnership and the Son-of-BOSS transaction were shams having no business purpose, but challenged the Final Partnership Administrative Adjustment's (FPAA) timeliness and the penalty. The Tax Court held that the step transaction doctrine applied and collapsing the steps the corporation distributed appreciated real estate to its shareholders and should have recognized gain under Sec. 311(b). The Court also held that for each partner in a TEFRA partnership, the limitations period for the assessment of tax attributable to partnership items or affected items is the longer of the period specified in Sec. 6229 or that prescribed by Sec. 6501. The Court noted that it had to consider the result in Home Concrete Supply, LLC when determining if the six-year statute of limitations applied. The Court found that for each partner part of the omitted gain was not attributable to the basis overstatement. Finally, the Court held that no Sec. 6662 penalty applied because the Tax Matters Partner relied reasonably and in good faith on independent professional advice.
Tip of the Day
Home mortgage insurance . . . It may be deductible as home mortgage interest, but you'll have to meet several requirements. First, the insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. Second, if your adjusted gross income (AGI) is more than $100,000 ($50,000 if married filing separate) the deduction is phased out. Third, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, you must allocate the premiums over the shorter of the term of the mortgage or 84 months, beginning with the month the insurance was obtained. No deduction is allowed for the unamortized amount if the mortgage is satisfied before its term. (The latter provision doesn't apply to insurance from the Department of Veterans Affairs or the Rural Housing Service.)
March 27, 2015
Haven't filed state income taxes for your corporation or LLC? Haven't filed that annual report? Your privileges in the state could be suspended or voided. That's what happened in Medical Weight Control Specialist (T.C. Memo. 2015-52). The Court held that the corporation's privileges in California were suspended when it petitioned the Tax Court. As a result, the Court did not have jurisdiction to hear the case.
The reason for setting up a corporation (or an LLC or limited partnership) is to protect the owner's personal assets from the creditors of the corporation. But that protection isn't impenetrable. In William J. Kardish, Sr. Transferee; Charles K. Robb Transferee (T.C. Memo. 2015-51) a corporation, Florida Engineered Construction Products Corp. (FECP) did well during the early 2000s but reported no income to the IRS. By the time the IRS caught up with the corporation it owed over $120 million and its fortunes had reversed. Because the corporation was strapped, the IRS sought to collect from other parties. Certain principles in the corporation transferred large sums into their own pockets. The petitioners were minority shareholders and not a party to the fraud, but the Court found that certain amounts they received as compensation or loans that would not be repaid were fraudulent transfers under Florida law and held them liable for a portion of the unpaid taxes as transferees for some of the years at issue.
Tip of the Day
Investment expenses . . . You may be able to deduct investment expenses such as investment advisory fees, fiduciary fees, publications, etc., but only if they relate to producing taxable income (and exceed the 2% threshold). If the expenses are incurred in producing tax exempt income, they are not deductible. If you can't associate the expenses with the income, you must apportion the expenses based on the income produced. The same rules apply for investment interest on funds borrowed to generate the income.
March 26, 2015
The IRS has released the 2014 IRS Data Book, a snapshot of agency activities for the fiscal year. The report describes activities conducted by the IRS from Oct. 1, 2013, to Sept. 30, 2014, and includes information about returns filed, taxes collected, enforcement, taxpayer assistance, and the IRS budget and workforce among others. The 2014 Data Book contains charts that show trends, such as the decline in the number of audits and the decline in telephone and in-person tax assistance and increases in the use of online resources and volunteer tax assistance. (The IRS Data Book contains a wealth of data such as the number of returns filed, the income (by group) on the returns, deductions taken, audit percentages, etc.)
The House is marking up a bill that would repeal the estate tax. Other bills in markup in the House include the Taxpayer Bill of Rights Bill of 2015, and several others that would modify the way the IRS conducts its activities.
Under the tax benefit rule amounts you receive as an overpayment, refund, etc. of a previously deducted item must be included in income. For example, you must report as income a state income tax refund in the year received, but only if you itemized in the prior year. If you didn't itemize, you didn't get a benefit for the taxes and your refund isn't includible in income. (There can be other reasons for not receiving a benefit.) In Jigal Elbaz et ux. (T.C. Memo. 2015-49) the taxpayers were shareholders in an S corporation that deducted real estate taxes. The benefit of the tax deduction was passed through to the shareholders by way of the reduced net income of the S corporation. The taxpayers received a QEZE (Qualified Empire Zone Enterprise) credit from the state on their personal return based on the real estate taxes paid. The Tax Court found that although the entities deducted the real property taxes, the shareholders/taxpayers led to a lower amount of income on their K-1 and that resulted in a reduced income tax liability which was a benefit to the taxpayers. Thus, the credit they received because of the real estate taxes was taxable income.
Tip of the Day
Medical expenses paid for others . . . You can deduct medical expenses you paid for yourself, your spouse or a dependent. To deduct these expenses the person must have been your dependent either at the time the medical services were provided or when you paid them. A person generally qualifies as your dependent if he or she was a qualifying child or a qualifying relative and a U.S. citizen or national or a resident of the U.S., Canada, or Mexico. You can include medical expenses paid for an individual that would have been your dependent but for the fact the he or she received gross income of $3,950 or more (2014) and filed a joint return for 2014.
March 25, 2015
Revenue Procedure 2015-25 (IRB 2015-14) provides the list of countries for tax year 2014 for which the minimum time requirements of the foreign earned income exclusion are waived.
You can only challenge your tax liability at a collection due process (CDP) hearing if you did not receive a statutory notice of deficiency or did not otherwise have an opportunity to dispute the liability. At the CDP hearing you can make an offer-in-compromise, ask for an installment agreement, etc., but generally not challenge your tax liability. In Walter Thorwald Skallerup, 3rd (T.C. Memo. 2015-48) the taxpayer petitioned the Court for review of the IRS Appeal's determination to proceed by lien to collect unpaid income tax liabilities. The Court held that the taxpayer's previous opportunities to challenge underlying tax liabilities for all but two of the years in issue precluded the Court's considering underlying liabilities for those years.
Tip of the Day
Child and dependent care credit . . . There's a chance you might miss this credit if you don't take it regularly. And, unless your preparer knows you well, he may not ask if you incurred the expenses. Basically, if you paid a day care provider, employed a nanny or babysitter, etc. to care for a qualifying individual to enable you (and your spouse if married) to work, you could qualify for the credit. The credit can be as much as 35% of the expenses incurred, but decreases as your adjusted gross income increases to 20% for AGI above $43,000. A qualifying individual is a dependent child under age 13, a disabled spouse physically or mentally unable to care for himself, or an physically or mentally disabled person whom you could claim as a dependent (such as a parent). Determining if you qualify for the credit is generally straightforward. Only the first $3,000 per child (maximum two children) of qualifying expenses can be used in calculating the credit--but child care expenses add up quickly. And even if your income is far in excess of $43,000, you'll get $600 of credit if you incur $3,000 in qualifying expenses. Any extra work is worth it since you're likely to be able to qualify for the credit for more than one year.
March 24, 2015
Most Tax Court cases where deductions are disallowed turn on the lack of documentation to support the expenses. But you may have to show that the expense was "ordinary and necessary". Often that's obvious--business insurance, chain saw for a landscaper, etc.--but not always. That's when you've got to show the relationship. In Urve V. Moyer (T.C. Memo. 2015-45) the taxpayer's business had declined substantially from that of only a few years earlier. In fact, for the year at issue, the taxpayer's gross income from the business was only $1,289. Many of the claimed deductions were disallowed for inadequate substantiation. After reviewing the expenses the Court found that a number of them were not shown to be "ordinary and necessary" for the business but were personal items such as music CDs, luggage, museum membership fees, camcorder, etc. The taxpayer claimed an auto was used full-time for business. The Court found that given the limited scope of the business, the auto was clearly used for business purposes infrequently and the taxpayer failed to establish the extent of the use. The Court allow only a small amount of expenses over what the IRS allowed.
Many tax benefits are associated with the purchase of personal (e.g., equipment, furniture) or real property. In some cases hard title in the property is not essential. For you sign an agreement to purchase a tractor from a neighbor, but because there's a lien on the equipment you can't get good title for some time. In the mean time you use the tractor, have maintenance done on it, etc. Because you've assumed the benefits and burdens of ownership, you could be viewed as having ownership. Whether a court will see it the same way will depend on all the facts and circumstances. In Ada Mae Pittman (T.C. Memo. 2015-44) the taxpayer claimed he purchased a residence and claimed the first-time homebuyer credit. The Court found the taxpayer had a lease with an unexercised option to purchase the property. The Court noted that an option to purchase in Florida does not give the optionee an equitable interest in realty until the option is exercised. The Court went on to say that Sec. 36 was clear in that a taxpayer must actually acquire a property to claim the credit. The Court held the taxpayer was not entitled to the credit.
Tip of the Day
Child's income . . . If your dependent child has investment income is $2,000 or less they can file their own return. If their total investment income is more than $2,000 the parent's tax rate may apply to part of the income instead of the child's rate. See the Instructions and Form 8615 to compute the tax. If the child's investment income is less than $10,000 you may be able to include the income on your return and the child will not have to file. See Form 8814.
March 23, 2015
The IRS has made changes to Publication 225, Farmer's Tax Guide, as a result of the Tax Increase Prevention Act of 2014 and a correction to Publication 523, Selling Your Home.
In John C. Bedrosian et ux. (144 T.C. No. 10) the taxpayers invested in a Son-of-BOSS transaction through a partnership that was subject to the partnership provisions of TEFRA. The IRS issued a Final Partnership Administrative Adjustment (FPAA) with respect to the partnership in determining that the partnership was a sham. The taxpayers did not file a timely petition. The taxpayers claimed deductions for professional fees. The IRS issued a notice of deficiency duplicating the partnership adjustments and also disallowing the deduction for professional fees. The IRS filed a motion to dismiss asserting that the Tax Court lacked jurisdiction over the entire case. In Bedrosian (T.C. Memo. 2007-375) the Court granted the motion in part but held that it had jurisdiction over the deductibility of the professional fees. The taxpayers sought leave to file a motion for reconsideration out of time that would asd the Court to revisit whether it had jurisdiction over the deductibility of the professional fees. The taxpayers assert that intervening caselaw would have the Court reach a different result. The Court held that in determining whether to grant leave to file a motion out of time, it may consider the merits of the underlying motion. The Court further held that the deductibility of professional fees paid and claimed as a deduction at the partner level is a factual affected item that is subject to deficiency procedures.
Tip of the Day
April 1 deadline . . . The IRS is reminding taxpayers who turned 70½ during 2014 that in most cases they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts and workplace retirement plans by April 1. While your bank, financial institution, financial advisor or CPA should be able to calculate the RMD, doing so is usually pretty straightforward. Get IRS Publication 590-B, Distributions from Individual Retirement Arrangements for guidance.
March 20, 2015
If IRS Commissioner John Koskinen's grilling before the House Appropriations Subcommittee on Financial Services and General Government is any indication, the Service isn't likely to see an increase in its budget anytime soon. The Commissioner was told that the IRS should be able to do more with the funding they have.
The IRS has recently updated a number of the topics in the Retirement Plans Frequently Asked Questions section of irs.gov.
The IRS previously published Notice 2014-5, which provides temporary nondiscrimination relief for certain “closed” defined benefit pension 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). The relief provided in Notice 2014-5 is applicable for a plan year that begins before January 1, 2016. Notice 2014-5 also included a request for comments with respect to these plans, to assist the Treasury Department and the IRS in developing proposed regulations. Notice 2015-28 (IRB 2015-14) extends for one year the temporary nondiscrimination relief for certain closed defined benefit pension plans provided in Notice 2014-5, so that a closed defined benefit pension plan to which the relief under Notice 2014-5 applies may continue to use the temporary relief for a plan year that begins before January 1, 2017.
In Charles W. King (T.C. Memo. 2015-36) the Court found the IRS handled the taxpayer's request for an installment agreement poorly and abused its discretion by failing to abate interest for a portion of the time the taxpayer's liabilities were outstanding.
Over-the-road truck drivers have to have a certain number of hours of rest in a 24-hour period. Some drivers take hotel rooms, but many sleep in their trucks. In Richard K. Howard (T.C. Memo. 2015-38) the IRS disallowed the cost of electricity purchased at truck stops (truck stop electrification expense) to power the taxpayer's vehicle (heating, cooling, etc.) while he was sleeping in the truck. The IRS found the cost analogous to the cost of a hotel room which was not deductible because the taxpayer had no permanent home and thus was not away from home while on the road. The Tax Court found the electricity was similar to the cost of diesel fuel which could have been used as an alternative, but was more expensive and created more wear and tear on the truck. The Court allowed the deduction.
Tip of the Day
Reservist in the military? . . . You may be entitled to some special benefits when it comes to IRAs. First, normally distributions from IRAs before age 59-1/2 are subject to a 10% additional tax. Qualified reservist distributions are one exception to the penalty. The basic requirement is that the distribution was related to a call to active duty for a period of more than 179 days or for an indefinite period. Second, contributions to an IRA are limited to $5,500 ($6,500 for taxpayers age 50 or older). Qualified reservists can contribute more to an IRA if the amount is a "repayment contribution" to replace funds taken out of the plan as a qualified reservist distribution. See IRS Publications 590-A and 590-B for the details.
March 19, 2015
In IR-2015-54 the IRS is reminding taxpayers who receive requests from the IRS to verify their identities that the Identity Verification Service website, idverify.irs.gov, offers the fastest, easiest way to complete the task.Taxpayers may receive a letter when the IRS stops suspicious tax returns that have indications of being identity theft but contains a real taxpayer’s name and/or Social Security number. Only those taxpayers receiving Letter 5071C should access idverify.irs.gov. The website will ask a series of questions that only the real taxpayer can answer. Once the identity is verified, the taxpayers can confirm whether or not they filed the return in question. If they did not file the return, the IRS can take steps at that time to assist them. If they did file the return, it will take approximately six weeks to process it and issue a refund.
The IRS has released a new ATG (Audit Techniques Guide), Real Estate Property Foreclosure and Cancellation of Debt. The Guide also covers exceptions to the rules, Forms 1099-A and 1099-C and passive activity losses.
In Ralim S. El (144 T.C. No. 9) the taxpayer failed to file a return and had unreported income as well as an early distribution from a pension plan. The Tax Court, for the first time, decided whether under Sec. 7491(c) the IRS has the burden of proof regarding the additional tax for an early distribution. The Court held Sec. 7491(c) does not shift the burden of production to the IRS with respect to the additional tax under Sec. 72(t) because the additional tax is a tax and not a penalty, addition to tax, or additional amount.
Tip of the Day
Making an IRA contribution? . . . A married couple could make a contribution of as much as $13,000 ($5,500 each plus $1,000 each for taxpayer age 50 or older). But if you're putting a significant amount in stocks or a mutual fund, consider spreading the contribution over two or three payments, say one month apart. That way you'll average the amount you pay instead of risking buying at a peak. You'll have to put the entire contribution in the bank or financial institution before April 15 (if the contribution is for 2014), but talk to the broker. They'll have a place for you to "park" the funds in a money-market type account.
March 18, 2015
The IRS and Free File Inc., also known as the Free File Alliance, have announced (IR-2015-52) a new five-year agreement that guarantees free, federal tax preparation software products for 70 percent of all taxpayers. The new agreement opens the door for innovations such as importing prior year information and requests for additional options for free state tax returns so that taxpayers have a seamless experience. It also provides greater transparency regarding any charges associated with state tax return preparation. Free File, available only at IRS.gov/FreeFile, provides taxpayers with free brand-name tax software or fillable form options. For 2015, anyone whose income was $60,000 or less is eligible for the free tax software. For people who made more than $60,000, the Free File Alliance provides Free File Fillable Forms, the electronic version of IRS paper forms. Free File also provides free tax extensions, with no income limitations. The goal of negotiations between the IRS and the Alliance was to improve the taxpayer experience when using Free File. For example, companies will be encouraged to import prior year tax return information to make tax preparation easier and import available information returns, such as Forms 1099. As part of the agreement, the Alliance agreed that it would ensure free federal and free state returns from IRS.gov for the 21 states plus District of Columbia that currently have their own partnerships with Alliance members. Alliance members would not be required to provide free state returns for all 50 states; however, some do so now. There also will be more information on IRS.gov about the Free File states and which companies offer free state tax preparation. Companies that charge for state tax preparation must also clearly display their fees on their landing pages. Companies also can expand their Free File offers to active duty military personnel beyond the income cap set for other taxpayers. As part of the agreement, the IRS will not develop a direct file return program of its own. The IRS and the Alliance currently are operating under a one-year extension. The new agreement will be effective October 31, 2015, through October 31, 2020.
The IRS has released final regulations (T.D. 9714) that amend the regulations (Sec. 9831) regarding excepted benefits under the Employee Retirement Income Security Act of 1974 (ERISA), the Code and the Public Health Service Act to specify requirements for limited wraparound coverage to qualify as an excepted benefit. Excepted benefits are generally exempt from the requirements that were added to those laws by the Health Insurance Portability and Accountability Act and the Affordable Care Act.
Tip of the Day
Measuring amount of a casualty loss . . . The amount of a casualty loss is generally measured by the difference in fair market value of the property before and after the casualty, less any insurance recovery. Neither the cost of repairing damaged property nor the cost of cleaning up is part of a casualty loss. However, you can use the cost of cleaning up or making repairs as a measure of the decrease in the fair market value if you meet all of the following:
March 17, 2015
In David J. Maines et ux. (144 TC No. 8) the taxpayers received targeted economic development payments from New York state. New York calls these payments "credits" and treats them as refunds for "overpayments" of state tax. All the credits required the taxpayers to make some amount of business expenditure or investment in targeted areas within the state. One of the credits, the QEZE Real Property Tax Credit, is limited to the amount of past real-property tax actually paid. The other two credits, the EZ Investment Credit and the EZ Wage Credit, are not limited to past tax actually paid. All the credits first reduce a taxpayer's state income-tax liability; any excess credits may be carried forward to future years or partially refunded. The Court held that the state-law label of the credits as "overpayments" of past tax is not controlling for Federal tax purposes. Because the EZ Investment Credit and the EZ Wage Credit do not depend on past tax payments, they are not refunds of past "overpayments" but rather are like direct subsidies. Because it does depend on past property-tax payments, the QEZE Real Property Tax Credit is treated like a refund of past overpayments. In addition, the portion of the EZ Investment Credits and the EZ Wage Credits that only reduce the taxpayer's state-tax liabilities are not taxable accessions to wealth. However, any excess portions of the credits that are refundable are taxable accessions to wealth to the taxpayers. The Court also held the portions of the QEZE Real Property Tax Credit payments that only reduce the taxpayer's state tax liabilities are not taxable accessions to wealth. Refundable portions of the QEZE Real Property Tax Credit payments are includable in the taxpayer's gross income under the tax-benefit rule to the extent that the taxpayers actually benefited from the previous deductions for property-tax payments.
Tip of the Day
File now, make IRA contribution later . . . The rule is that you've got to make your IRA contribution by the due date of your return--April 15. You can claim an IRA contribution, file your return, get your refund and then make the IRA contribution. But time is running out if you're waiting for the refund to make the contribution. You can speed things up with a direct deposit. Even better, you can designate that part or all of your refund be deposited in your IRA account. Don't forget, you can split your refund and have it deposited in multiple accounts. Use Form 8888. Remember, April 15 is the absolute deadline, filing extensions don't apply to an IRA contribution.
March 16, 2015
The IRS has announced (Rev. Rul. 2015-5) that interest rates on under- and overpayments will remain the same for the calendar quarter beginning April 1, 2015. The rates will be:
The IRS has released final regulations (T.D. 9713) relating to information reporting by brokers for bond premiums and acquisition premium. The document also contains final and temporary regulations relating to information reporting by brokers for transactions involving debt instruments and options, including the reporting of original issue discount (OID) on tax-exempt obligations, the treatment of certain holder elections for reporting a taxpayer's adjusted basis in a debt instrument, and transfer reporting for Sec. 1256 options and debt instruments.
In IRS Fact Sheet FS-2015-14 the Service is advising taxpayers that they may qualify for an exemption from the individual shared responsibility payment if you didn't have the required health care coverage. While you can claim most exemptions on your tax return, some exemptions require you to apply for the exemption through the Health Insurance Marketplace. See Form 8965, Health Coverage Exemptions and the Instructions.
Tip of the Day
Buy or sell a business in 2014? . . . If so you might have to include Form 8594 Asset Acquisition Statement (Sec. 1060) with your return. Both the buyer and the seller of a group of assets that make up a trade or business must use Form 8594 to report such a sale if goodwill or going concern value attaches, or could attach, to such assets. There are some exceptions. See the Instructions to the form.
Copyright 2015 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