For the full text of a Revenue Ruling, Revenue Procedure, new Regulation, Notice, or Announcement go to:
  Internal Revenue Bulletins
For a Tax Court Case:
  Tax Court Cases
For IRS News Releases:
  News Releases and Fact Sheets
For Fact Sheets (Current Year):
  Fact Sheets
For Letter Rulings and Technical Advice Memoranda:
  IRS Written Determinations
For IRS Forms and Publications:
  Forms and Publications

June 19, 2013

News

The IRS has announced (Rev. Rul. 2013-15) the Applicable Federal Rates for July, 2013. The mid- and long-term rates have increased significantly and the new rate under Sec. 7520 for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest has increased to 1.4%. The IRS also announced that the blended annual Applicable Federal Rate for 2013 is 0.22%.

The IRS has announced that certain areas in North Dakota are eligible for assistance from the government because of flooding during the period of April 22 to May 16, 2013. As a result taxpayers in the counties of Benson, Bottineau, Cass, Cavalier, Eddy, Foster, McHenry, Pembina, Ramsey, Renville, Richland, Rolette, Towner, Traill, Walsh and Wells and the Spirit Lake Reservation who sustained losses attributable to the disaster may deduct the losses on their 2012 returns.

Tip of the Day

Bulletproof will . . . Some wills won't be challenged. You don't have any relatives other than your son and his family and you're leaving everything to him. But leave out a relative who's on the same level--for example, another son or a grandchild, and you want to make sure all the i's are dotted and the t's crossed. Don't modify the will in any way--have your attorney add a codicil or redraft the will. And, if you're really worried about your relatives contesting the will, talk to an attorney who specializes in estates about steps you can take to insure any challenge will be defeated.

June 18, 2013

News

The recent IRS scandal involving applications of some organizations for tax-exempt status may precipitate substantial changes in the IRS. Senator Max Baucus (D-Mont.) the Chairman of the Senate Finance Committee and House Ways and Means Committee Chairman Dave Camp (R-Mich.) have indicated it may be time to restructure the IRS. Both of the top tax writers have indicated additional investigations will be forthcoming.

Chief counsel notice CC-2013-011 provides IRS Chief Counsel attorneys with guidance regarding the standard and scope of review that the Tax Court applies when reviewing requests for Section 6015(f) (innocent spouse) relief from joint and several liability. This Notice also provides litigation guidance for cases that involve claims for relief under Section 6015.

Tip of the Day

What's a partnership? . . . Most of the time it's obvious. Fred and Sue agree to set up a consulting practice and share the profits-or the losses. They don't actually have to register as a partnership to be one for tax purposes. (We won't go into the legal issues here.) That's clearly a partnership. The IRS defines a partnership to include a syndicate, group, pool, joint venture, or other unincorporated organization with a least two members, and the venture must not be a joint undertaking merely to share expenses. There are eight factors the IRS may examine to determine if a partnership exists. But it frequently comes down to were you and the other party in a business together or were you simply sharing costs or was one party merely entitled to a percentage of the gross. For example, Fred and Mike own adjacent timberland. They agree to split the cost of building a road on the property line to allow them to haul the timber. That's not a partnership. Later Fred offers to cut Mike's timber giving Mike a percentage of the gross profit. Still not a partnership. Finally, Fred and Mike agree to purchase a bulldozer together and agree to cut and take the timber to a local sawmill, splitting the profits. That's a partnership. Be careful. It's often easy for a joint undertaking to rise to the level of a partnership.

June 17, 2013

News

Tax accrual workpapers prepared for use by outside auditors in determining an entity's exposure to additional taxes can obviously be very useful to tax auditors. In Wells Fargo & Company (U.S. District Court, Dist. of Minnesota) the taxpayer contended that it need not respond to the summonses for five main reasons: (1) the IRS had an improper purpose in issuing the summonses; (2) much of the information sought by the summonses is protected by the work product privilege; (3) eight of the documents sought are protected by the attorney-client privilege; (4) information sought about the taxpayer's state and local tax returns are irrelevant to the IRS's audit; and (5) information about Wachovia Corporation's ("Wachovia's") financial statements and tax returns are irrelevant to the IRS's audit of the taxpayer. On these issues, the Court concluded, respectively, that (1) the United States has demonstrated a legitimate purpose to support its summonses; (2) certain aspects of the information Wells Fargo seeks to withhold are protected by the work product privilege, while other information does not fall under the privilege; (3) eight documents sought by the IRS are protected by the attorney-client privilege; (4) the United States has not shown that information about the taxpayer's state and local taxes is relevant; and (5) the United States has not shown that information about Wachovia is relevant.

Tip of the Day

Looking for venture capital? . . . Many beginning entrepreneurs think just because they've got a good idea, they'll get funding. Actually, only a small percentage of businesses receive such assistance. A larger percentage receive funding from angel investors, but even that number is low. Both sources generally are looking for companies that have the potential for hypergrowth. In addition, you'll have to give up a big share of your equity--sometimes as high as 65% or more. Of course, if your business could be the next Google, keeping only 25% would still make you hyper rich. Most small businesses get startup capital from friends, relatives, and credit cards. This is definitely one of those times when you need well grounded outside advice. Talk to your CPA or financial adviser.

June 14, 2013

News

Victims of severe storms, tornadoes and flooding that began on May 18, 2013 in parts of Oklahoma may qualify for tax relief from the IRS. The President has declared Canadian, Cleveland, Lincoln, McClain, Oklahoma and Pottawatomie counties a federal disaster area. Individuals who reside or have a business in these counties may qualify for tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. The tax relief postpones various tax filing and payment deadlines that occurred starting on May 18, 2013. As a result, affected individuals and businesses will have until Sept. 30, 2013 to file these returns and pay any taxes due. This includes the June 17 and Sept. 16 deadlines for making estimated tax payments. A variety of business tax deadlines are also affected including the July 31 deadline for second quarter payroll and excise tax returns and the Sept. 3 deadline for truckers filing highway use tax returns. In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after May 18, and on or before June 3, as long as the deposits are made by June 3, 2013.

You may be able to exclude up to a certain dollar amount (an amount that's indexed for inflation) of earnings if your tax home is in a foreign country for a full year and you're actually present in that country at least 330 full day during the period. You can get a waiver for the length of the period if the IRS determines that individuals were required to leave the foreign country because of car, civil unrest, or similar adverse conditions. Basically, that's what the taxpayer claimed in James F. Daly et ux. (T.C. Memo. 2013-147) and he prorated the exclusion. The Court found that the taxpayer's tax home was Utah, not Iraq or Afghanistan. His wife remained at home, he did not open a bank account in Iraq or Afghanistan and he lived on Air Force bases and was not allowed to leave. The Court found the taxpayer did not qualify for the foreign earned income exclusion.

In Basem Hassan (T.C. Memo. 2013-145) the taxpayer pleaded guilty to a charge of underreporting his gross receipts on his Schedule C for a business distributing infant formula. The taxpayer was required to pay restitution based on the unreported gross receipts and cost of goods sold equal to one half of the increased receipts. The IRS subsequently sent a notice of deficiency claiming additional amounts due based on the higher receipts. The IRS, however, did not increase the cost of goods sold by the taxpayer. The taxpayer argued he should be entitled to the higher cost of goods sold deduction allowed in the restitution calculation in the criminal case. The taxpayer contended that he was entitled to the amount and the IRS was collaterally estopped from relitigating the matter. The Court held that in the criminal case the taxpayer plead guilty, so the issue was not actually litigated. Moreover, the taxpayer's plea agreement expressly provided that the restitution amount was an estimate.

Tip of the Day

Deduction must be taken in proper year . . . You generally can't decide on which year to take a deduction. If you're on the cash method, it's when you pay the expense. If you're on the accrual method, it's when it's incurred. You can't just decide to take the amount in a later year because works better for you. But we said, generally. You can alter the year of the deduction, but only by changing the facts. For example, you're on the cash method and don't want to take a deduction in 2013. Just don't pay it until 2014. Your options are more limited if you're on the accrual method. If you order the office supplies in 2013, that's when they must be deducted, even if you don't pay for them until 2014. But the rules on deducting expenses if you're on the accrual method are more complicated. Talk to your accountant if the items are significant. And be sure to describe the facts carefully.

June 13, 2013

News

The IRS is reminding taxpayers that, due to the current budget situation including the sequester, the agency will be shut down on Friday, June 14. As was the case on May 24, the first furlough day, all IRS operations will again be closed on June 14. This means that all IRS offices, including all toll-free hotlines, the Taxpayer Advocate Service and the agency’s nearly 400 taxpayer assistance centers nationwide, will be closed. Because none of the furlough days are considered federal holidays, the shutdown will have no impact on any tax-filing or tax-payment deadlines. The IRS will be unable to accept or acknowledge receipt of electronically-filed returns on any day the agency is shut down. The only tax-payment deadlines coinciding with any of the furlough days relate to employment and excise tax deposits made by business taxpayers. These deposits must be made through the Treasury Department’s Electronic Federal Tax Payment System (EFTPS), which will operate as usual.

The IRS has updated its notice with respect to the severe storms, straight-line winds and flooding began on April 16 in parts of Illinois to include the counties of Adams, Brown, Calhoun, Clark, Douglas, Henry, Mercer, Ogle, Pike, Putnam, Warren, Whiteside and Winnebago.

Alimony is deductible by the payer, but there are some strict rules as to what qualifies as alimony under the tax law. The first requirement is that the payment is received by a spouse under a divorce or separation instrument. In James J. Faylor (T.C. Memo. 2013-143) the taxpayer's payments were not made under a decree, but the taxpayer argued there was a meeting of the minds. The noted that the agreement must be in writing and that a written separation agreement has been interpreted to require a clear statement in written form memorializing the terms of support between the parties. The Court also noted that while the attorneys exchanged letters proposing differing temporary support amounts and terms, neither the taxpayer nor his spouse signed the drafts. The Court found the $20,000 in payments were not deductible.

Tip of the Day

What do your customers want? . . . Don't assume you know. One small transportation provider is providing service to smaller towns ignored by bigger carriers. Their equipment is older (and cheap), their prices higher, and their service is nowhere near the best, but it's the only game in town so they're making good money. Turns out the customers will put up with those issues just to get service. Much the same can apply to products. Do all your customers want a fully-loaded product or are they really interested in a cheaper, reliable workhorse? Make sure you find out what your customers want and you're carefully tracking what they're are buying.

June 12, 2013

News

Due largely to low usage, the IRS has announced it will retire and remove the Disclosure Authorization (DA) and Electronic Account Resolution (EAR) applications from e-Services effective Aug. 11. In anticipation of this change, the IRS has increased the number of employees who process authorizations and has improved internal work processes to decrease the average processing time significantly from the current 10-day processing period. The IRS will continue to explore better ways to reduce processing time and improve overall service to the users. Once IRS removes the two applications, former DA users will need to complete Form 2848, Power of Attorney and Declaration of Representative, or Form 8821, Tax Information Authorizations, and mail or fax it to the appropriate IRS location listed on the form's instructions. Practitioners should allow at least four days for the authorization to post to the IRS database before requesting a transcript through the Transcript Delivery System. Former EAR users should call the Practitioner Priority Service at 1-866-860-4259 for help resolving account-related issues.

The IRS has made several updates to the Internal Revenue Manual with respect to Whistleblower Awards. This interim guidance memorandum is being issued to communicate changes to procedures for collected proceeds, corresponding with the whistleblower and the representative, confirming that the representation has been terminated, timing of award determination, processing of Form 211 Claim for Award, Award Computation, and Funding Awards. The impacted IRM sections will be updated to reflect these corrections.

In Pamela Lynn Brooks (T.C. Memo. 2013-141) the taxpayer invested some $34,000 in real property owned by a relative. The intent was to use the funds to make improvements so the property could be sold. On sale, the taxpayer would be entitled to a portion of the proceeds from the sale and a profit on her investment. Not long after the improvements were made the relative died. Some 10 years later the relative's family attempted to sell the property. The taxpayer sued the estate. The estate settled with the taxpayer and she was awarded $17,000; she incurred legal expenses of $2,000. The taxpayer claimed a capital loss on the transaction of $19,000. The IRS contended she was not entitled to a capital loss because she failed to show either that she owned or had an enforceable interest in the property or that she made the improvements with the intent to make a profit. The IRS also argued that she was not entitled to a bad debt loss because she did not show she had a bona fide loan arrangement. The Court noted that a taxpayer must have an economic interest in the property to be allowed a loss deduction. (In a footnote the Court noted that the fact that there was a settlement in state court did not prove an ownership interest.) The taxpayer presented no written evidence signed by the relative and the taxpayer showing a property interest, but the Court found the taxpayer's testimony to be credible. The Court also believed the taxpayer had a profit motive in making the investment and allowed the loss under Sec. 165.

Tip of the Day

Loser? or winner? . . . Your competitor in the next county just outbid you for another competitor who was selling his business. Is that bad news for you? Maybe. Maybe not. It's not unusual for a company to buy a business and leave itself with little or no free cash remaining. In a number of instances the lack of remaining capital has forced the buyer into a dangerous position and, in some cases, the acquirer has failed. That's particularly true with a capital intensive business, but it can also happen with a service business that's been poorly managed and or has cash needs. It could be the competitor who outbid you is now vulnerable. Use that cash you were holding for the acquisition to put pressure on him by advertising more, cutting prices, etc. Talk to your advisers to determine the best move.

June 11, 2013

News

The Senate Finance Committee Staff has issued the eight in a series of papers compiling tax reform options that Finance Committee members may wish to consider as they work towards reforming the Tax Code. This 24-page paper discusses options related to income and business entities. The paper could have implications for changes in the way partnerships and S corporations are taxed. If Congress does deal with tax reform this year, there's a good chance there will be changes in this area.

There are often business reasons for setting up a separate management company to provide services to other entities owned by the same parties. For example, Chatham does invoicing, accounts payable, payroll, etc. services for Madison Inc, Peter's Publishing LLC, and Hudson Services, Inc. where all the entities are under common ownership. Using a management company can make accounting simpler and more efficient. It can also result in state tax savings if the entities do business in more than one state. In Wiley M. Elick et ux. et al. (T.C. Memo. 2013-139) the taxpayer had a professional practice and set up a management company to perform services for his practice. There was a contract between the practice and the management company specifying the work to be performed and the payments to be received. The IRS argued that the management fees were unnecessary because the management company provided no services. The Court found the taxpayer failed to show the management company rendered any services. Further the taxpayer acknowledged that third parties provided such services that the management company was to provide. There was no indication the management company performed the requirements of the contract, not even providing the taxpayer with monthly invoices for work performed. The Tax Court disallowed the deduction for the management fees.

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.

June 10, 2013

News

The bill that would have kept the student loan interest rate at the current level has failed to advance in the Senate.

You can take a charitable contribution deduction for a conservation easement. The amount of the deduction is measured by the difference in the fair market value of the land before and after the granting of the easement. In Michael S. Mountanos (T.C. Memo. 2013-138) the land already was burdened with restrictions on the development of the property for residential use. The Court also noted there were restrictions on the availability of water for use as a vineyard. The Court found that the taxpayer failed to prove that the property's before and after highest and best use differed, and it followed that the taxpayer also failed to show that the conservation easement diminished the ranch's after fair market value. Thus, the taxpayer failed to show that the conservation easement had any value.

Tip of the Day

Nexus for sales tax . . . The rules used to be simple. If you have no salesmen or property in a state, you don't have to collect sales tax. Many catalog companies for years only collected sales tax on sales in their home state. The internet is changing that. Many states have or are planning to introduce legislation that would extend the connection. Some states now require you to collect sales tax in their state if websites located in the state generate sales for the out-of-state seller (click-thru rules). For example, Madison Inc. which has no connection to a state advertises on Chatham's website whose home is located in that state. If a customer clicks on Chatham's site and buys product from Madison, Madison may be liable for sales tax in the state. But some of the laws go beyond just internet activity. Legislation in Congress could change the rules here. You should also be careful if you have an affiliated company in the state. For example, Madison Inc. has a subsidiary named Kingfield. While Madison has no operations in the state, Kingfield does and uses the same trademarks and accepts products sold by Madison through the mail for return. Kingfield also will install Madison products. Madison could be liable for sales tax on sales in the state. This is a complex area and depends heavily on the facts and circumstances. Moreover, the rules vary from state to state. Talk to your tax adviser if you do business in other states.

June 7, 2013

News

The Mexican Federal Constitution prohibits non-Mexican persons from directly holding title to residential real property in certain areas of Mexico. Non-Mexican persons, however, may hold residential real property located in restricted zones through an MLT (Mexican Land Trust) arrangement with a Mexican bank after obtaining a permit from the Mexican Ministry of Foreign Affairs. In Rev. Rul. 2013-14 (IRB 2013-26) the IRS held that an MLT is not a trust within the meaning of Sec. 301.7701-4(a).

In Benjamin J. Ashmore (T.C. Memo. 2013-137) the taxpayer failed to report some W-2 earnings. During the years at issue he should have received multiple W-2s (though he worked for the same employer). The taxpayer contended that he never received the second Form W-2 for his wages of $20,567 earned from February 17 to May 26, 2009, and, therefore, did not include these wages on his 2009 Federal income tax return. The taxpayer suggested that the missing Form W-2 for 2008 and the second Form W-2 for 2009 are indicative of widespread errors by the payroll service that constitute reasonable cause that prevents the application of the Section 6662(a) accuracy-related penalty. The Court disagreed. A taxpayer's reliance on erroneous information reported on a Form W-2 indicates reasonable cause and good faith, provided the taxpayer did not know or have reason to know that the information was incorrect. The Court noted it has previously held that the nonreceipt of a tax document, e.g., a Form W-2, does not excuse a taxpayer from his or her duty to report the income. The Tax Court found him liable for the accuracy-related penalty.

In Dominick Galuzzo et al. (T.C. Memo. 2013-136) the IRS sought to dismiss the taxpayer's petition claiming it was not timely filed. On June 2, 2005, the IRS purportedly mailed to each taxpayer a notice of deficiency for the taxable years 1999 through 2001. The taxpayers credibly testified that they did not receive the notices of deficiency and that they did not recall receiving any correspondence from the IRS in June 2005. The IRS was unable to find the administrative file, and accordingly, was unable to provide the Court (or taxpayers) with copies of the notices of deficiency for 1999, 2000, and 2001. The IRS was able to produce U.S. Postal Service Form 3877 (Form 3877) which states that a notice of deficiency covering the taxable years 1999, 2000, and 2001 was mailed to each petitioner on June 2, 2005. The Tax Court found the IRS failed to provide it issued a notice of deficiency and the Court dismissed the case for lack of jurisdiction on the ground that the IRS did not issue a notice of deficiency for those years.

Tip of the Day

Gifts to customers subject to sales tax . . . Do you give merchandise to customers? For example, you buy 100 t-shirts with your name and logo imprinted and give them to current or prospective customers, clients, etc. The purchase is subject to sales tax, even though they're not for resale. That's the rule in many states. You owe the sales tax on the items based on your purchase cost. Other items such as signs and printed items you provide to franchisees or customers may also be taxable. Check the law in your state.

June 6, 2013

News

In Antonio Lepore (T.C. Memo. 2013-135) the taxpayer convinced the Tax Court that he did not receive a Letter 1153, despite the fact that one of his sons signed for it at his home. The IRS contended that the taxpayer should be considered to have received the Letter 1153 because his son signed for it. Receipt of a document by another person in the addressee's house is sufficient in other contexts. However, no similar rule has been set forth as a construction of Sec. 6330. Under the particular circumstances of this case, the Court held that the taxpayer did not receive the Letter 1153.

There were several issues in Alan J. Powers et ux. (T.C. Memo. 2013-134), but we'll focus on the denial of losses from pass-through entities. The IRS denied the taxpayers' losses because they could not show they had sufficient basis in the entities to deduct the losses. The Court noted that because the taxpayers chose to structure their business dealings through a complex web of more than a dozen pass-through entities, any evidence that may resolve the disputed factual issues, such as the taxpayers' bases in the entities and their income from these entities, will necessarily come from the taxpayers. Complicating the matter is the scarcity of relevant and credible documentary evidence that can substantiate the taxpayers' claims. Thus, it was ever more so important for the taxpayers to provide credible, persuasive, and detailed testimony to show the IRS's determinations were erroneous. The taxpayers' presentation at trial failed in this regard. The Court also noted the difference in determining debt basis between an S corporation and a partnership. The Court sided with the IRS in denying all but a small portion of the losses.

Tip of the Day

Get your books in order . . . This time we're not talking about your general ledger, but your corporate or LLC books. If you're selling your business, going for a loan, getting audited by the IRS, etc. there's a good chance someone will want to look at your stock certificates, annual meeting minutes, board vote authorizing the purchase of property, operating agreement for an LLC, documentation for a loan, lease agreements, etc. The IRS may be looking for dealings between owners and their corporation, LLC or partnership; a bank or buyer of the business may be looking at other documents. Should you be asked for the documents it could be years after they should have been prepared. Don't assume you can reconstruct the information. Even if you can prepare them after the fact, it's almost certain to be more expensive. Check with your attorney on what's required.

June 5, 2013

News

The IRS has updated its notice with respect to the severe storms, straight-line winds and flooding began on April 16 in parts of Illinois to include the counties of Brown, Calhoun, Clark, Douglas, Henry, Pike, Whiteside, and Winnebago counties.

In Gary L. Ward et ux. (T.C. Memo. 2013-133) the taxpayer was a tax return preparer who failed to report pass-through income from several S corporations and capital gains on a stock sale. The taxpayer also used false paper trails to substantiate Sec. 179 deductions for autos. The IRS uncovered the false documentation when it checked VIN (vehicle identification numbers) with the state motor vehicle department. The taxpayer also provided tax returns to a bank as documentation for a loan that showed substantially more gross income ($307,699) than on the return sent to the IRS ($45,010). The Court found the taxpayer liable for the fraud penalty noting he had a pattern of underreporting his income for all the tax years at issue. In addition, he failed to maintain adequate records. The Court allowed the 75% fraud penalty under Sec. 6663.

Tip of the Day

Utilizing a temp . . . Years ago most temps were simply clerks, bookkeepers, etc. who worked part-time. Often that's no longer the case. Many people with considerable skill have taken temp jobs simply because they couldn't find permanent work in their field or at their level. You may only need to find a replacement for a clerical job, but the temp has a degree in accounting. You may be able to use him or her for other work--at a good rate. We know of one out-of-work advertising director who was hired to do mid-level graphics work for a small advertising agency. He made some out-of-the-box suggestions for a proposal for ad campaign the company was bidding on. The struggling company landed the job which accounted for more than 25% of its revenue the following year.

June 4, 2013

News

Documentation is the key to deductions. In Paul Frederick Jones (T.C. Memo. 2013-132) the taxpayer was a sales associate for a company that sold pre-paid legal services. The taxpayer was entitled to commissions on his sales and, pursuant to a multilevel marketing arrangement, was entitled to a percentage of revenue generated by sales associates he recruited. In 2007 he had nonemployee compensation of $50,984 and claimed expenses of $45,011.62. The Tax Court reviewed expenses in some 58 categories listed by the taxpayer. It allowed only some $24,078.09 of the claimed deductions. Disallowed deductions included a portion of the taxes on the taxpayers home because none of the home was used exclusively for business, travel expenses were disallowed because he could not show that he paid the expenses, the amount of the expenses or that the alleged expenses were the ordinary and necessary expenses of his business. Lodging expenses were disallowed because the taxpayer did not show the amount of each hotel expense, the date of departure and date of return for the trip corresponding to the hotel stay, the destination of the trip and the business reason for the trip by adequate records. For cab and bus fare, amounts were disallowed because the taxpayer did not show by adequate documentation the date of departure and return for the trip for which the expense related, the destination, and the business reason. The Court disallowed a credit card finance charge as not related to the taxpayer's business.

Tip of the Day

Dividend paying stocks . . . A good investment? It depends. Buying stocks for the dividend yield can make sense, but, like bonds, they're not without risk. If interest rates rise (and they will sooner or later), the price of the stock could fall (because the yield will be less attractive). In that respect, they're like bonds. But there are advantages to stocks. First, the dividends are still taxed at a lower rate than the interest on bonds. Second, the interest paid (the coupon) on a bond will never increase. Many companies have a history of increasing the dividend on common stocks. Third, while a bond may be called, the only way your stock can be "called" is if the company is sold or merged. Fourth, you can still participate in the growth of the company resulting in the price of the stock increasing. While dividend yields are not as attractive as they were when the stock market was lower, they're better than many alternatives. Look for stocks they are well situated in good markets that have a history of paying dividends. The usual risk rules apply--stocks entail more risk and the higher the yield, the higher the risk. Talk to your investment advisor.

June 3, 2013

News

The IRS announced (Notice 2013-40, IRB 2013-25) it is suspending certain requirements under Sec. 42 for low-income housing credit projects to provide emergency housing relief needed as a result of the devastation caused by severe storms and tornadoes in the State of Oklahoma that occurred between May 18, 2013, and May 27, 2013. This relief is being granted pursuant to the Service's authority under Sec. 42(n) and Sec. 1.42-13(a). This notice should be read with Notice 2013-39, which suspends certain requirements under Sec. 142(d) for qualified residential rental projects financed with exempt facility bonds under Sec. 142 to provide emergency housing relief due to the Tornadoes.

The IRS has announced that William Robert Hupman Jr., pleaded guilty today to corruptly endeavoring to obstruct or impede the due administration of the internal revenue laws. According to court documents, Hupman managed and controlled Security Concepts LLC, a security alarm company based in Mebane, N.C. Instead of receiving a salary from Security Concepts, Hupman received income by using a Security Concepts debit card to pay his expenses. Despite receiving over $770,000 in such fees between 2007 and 2011, Hupman has not filed an individual income tax return since tax year 2006. In addition to his failure to comply with his personal income tax responsibilities, Hupman also failed to comply with his employment tax responsibilities at Security Concepts. As the person who managed and controlled Security Concepts, Hupman was responsible for withholding employment taxes and paying them over to the IRS on a periodic basis. Despite the fact that employment taxes were withheld from the wages of Security Concepts employees, Security Concepts has not paid employment taxes and filed the required tax form since the third quarter of 2009. Hupman neither paid over employment taxes nor filed the required tax form for the fourth quarter of 2009 and each of the quarters in 2010 and 2011. He also has not paid the federal unemployment taxes owed or filed the required tax form for years 2009, 2010, or 2011. Hupman faces a maximum of three years in prison, one year of supervised release and a maximum fine of $250,000.

Tip of the Day

Appearance counts . . . You may be the best service provider in your county, but you may not have maximized your business if you present a lousy appearance. Fred is a great plumber, but his truck looks like it was just salvaged from a hurricane. His existing customers don't care, but he's not picking up new business when he rides around town with his name emblazoned on the side. Sue's garden center provides care instructions for plants. But they're 12th-generation copies from a lousy, generic original. Worse, they show a revision date from some 10 years ago. Replacing Fred's truck won't be cheap so that's not a snap decision (although a wash job makes sense); Sue's instructions won't cost much. In fact, for little additional cost she could add her logo and make the instructions into a marketing tool. Unfortunately, sometimes appearance can mean more to a customer than the quality, price, etc. of the actual service or product.

May 31, 2013

News

Earlier in May the president determined that parts of Iowa and South Dakota are eligible for government assistance as a result of severe weather conditions. In Iowa the disaster was a severe winter storm from April 9 to April 13 in the counties of Dickinson, Lyon, O’Brien, Osceola and Sioux. For South Dakota the was a severe winter storm and snowstorm from April 8 to April 10 in the counties of Douglas, Hutchinson, Lincoln, McCook, Minnehaha, Shannon and Turner and the Pine Ridge Reservation in Shannon County.

IRS News Release IR-2013-56 contains tips for individual and business taxpayer to safeguard themselves against natural disasters in light of the upcoming hurricane season.

Notice 2013-38 provides a simplified procedure for a State or local government to amend its nomination of an empowerment zone. This will facilitate extending the nomination, so it will have a new termination date of December 31, 2013.

Tip of the Day

S corporation basis . . . Usually it's pretty simple to compute. But it can become complex if there are stock transactions over the years. Fred, Sue, and Mike started the company in 2001 with Fred and Sue contributing $40,000 each and each receiving 4,000 shares of stock ($10 a share). Mike contributed only $20,000 and got 2,000 shares of stock. The three adjust their basis each year by adding their share of income and subtracting their share of losses and distributions. But in 2008 Mike sold his interest to Fred and Sue, in equal amounts, for $35 a share. For Fred and Sue $35 is the starting basis in those shares. They have to adjust their basis in those shares separately. Thus, if they sell their entire interest in the business they'll be selling some shares with a basis of $10 (adjusted for income, losses and distributions) and some shares with a basis of $35 (as adjusted). The computations are pretty easy if they're done every year with the tax return, but get much more involved if you've got to dig up years of tax returns. It can get extremely challenging if recordkeeping has been lax. And you should identify the shares you're selling if you're only selling a portion of your holdings. You might be able to control whether you have a gain or loss and the magnitude. Talk to your tax adviser to make sure he's updating your basis each year.

May 30, 2013

News

The IRS has updated its notice with respect to the severe storms, straight-line winds and flooding began on April 16 in parts of Illinios to include the counties of Bureau, Crawford, Henderson, Knox, Livingston, Marshall, Mason, McDonough, Peoria, Rock Island, Schuyler, Stark, Tazewell and Woodford.

The Supreme Court has denied certiorari to Historic Boardwalk Hall LLC, a partnership that sought review of the holding by the Court of Appeals for the Third Circuit that a private-sector investor was not a bona fide partner so that the partner was not able to claim historic rehabilitation tax credits.

In Uniband Inc. (140 T.C. No. 13) the a Delaware corporation wholly owned by an Indian tribe attempted to file consolidated returns with another corporation wholly owned by the tribe. The IRS determined the consolidated returns were invalid. The taxpayer then contended that it was not subject to corporate income tax because it is an integral part of the tribe, which because it is an Indian tribe is exempt from income tax. The Court held that the corporation was a state-chartered corporation, a separate and distinct entity from the tribe and was not exempt from the corporate income tax. The Court also held that the consolidated returns filed for the years at issue were invalid and that the Indian employment credits under Sec. 45A are not elective, and as a result, the corporations employee expense deductions must be reduced by the amount of the credit.

Tip of the Day

Secrecy breeds distrust . . . Yes, details of a pending acquisition, hiring of a new CFO, product development activities, etc. usually have to be kept secret. But keeping things secret that don't have to be creates distrust among employees. Moreover, when employees get their news through the grapevine, and they will, it's often inaccurate or not complete creating more of a problem. Whether the information is good or bad, sharing with employees makes them feel their part of a team. Much the same is true of making people work in isolation without sharing information.

May 29, 2013

News

In Juanita Wright (T.C. Memo. 2013-129) the Court noted there was no dispute that in 2006 the taxpayer suffered water damage to her property. The IRS contended, however, that any loss was not deductible until the taxpayer's claim was resolved by Nationwide Insurance, that the claim was still pending as of the end of 2006, and that, in any event, the taxpayer had not substantiated any loss not reimbursed by insurance. (The regulations preclude deduction of a casualty loss in a year in which there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery.) The taxpayer contended that she was told in 2006 that her claim against Nationwide Insurance was closed and that the subsequent payments were the result of "reopening" that claim. The record of ongoing communications between her and the insurance company, however, contradicted that contention. She testified that the $1,500 she received in 2007 "wasn't part of the $15,000" and she was "going to take it off of my 2008 taxes". However, all of her claims were identified as resulting from water damage on August 12, 2006, and were part of the same claim against the insurance company. Her testimony and the Nationwide Insurance records undermined her claim that the amount of loss from the 2006 casualty was resolved during 2006. The taxpayer also argued that she was never compensated for the value of her clothing, textbooks, photographs, x-rays, and other personal property. She denied receiving any payments in 2006 for damaged items, but again her contention was contradicted by records of the insurance company. She relied on her estimates of replacement costs or original costs, but she did not shown the fair market value of any of the property at the time of the loss. The taxpayer did not show what items were not compensated by insurance, and her representations with respect to the insurance claim were inconsistent and unreliable. The Court found no rational basis on which to estimate the correct allowance, if any. The Court found the taxpayer was not entitled to any deduction for the casualty loss claimed for 2006.

Tip of the Day

Taking care of your parents? . . . It's not that unusual that one sibling, often because he or she lives nearby, ends up performing the bulk of the work in taking care of elderly parents. Whether or not that individual wants to be compensated is a separate issue. But if the caregiver is seeking to be compensated or is promised compensation on the death of the parent (or other relative) provision should be made in the will. You shouldn't expect the siblings to gratuitously relinquish a portion of their inheritance. In fact, the contrary can happen. Fred helps his mother for five years and gets 60% of the estate while sisters Sue and Carol get 20% each. It's not unusual for the parties receiving the smaller share to complain. The will should specifically state that Fred is getting the larger share because of his efforts. While the courts can sometimes correct an inequity, don't count on it. There can be a number of ways to handle the issue but the solution may require taking a number of financial and personal factors into account. There can also be tax consequences. Talk to your attorney.

May 28, 2013

News

Income is taxable whether you earned it honestly or dishonestly. The IRS and the FBI announced the arrest of Glafira Rosales, an art dealer, for filing false tax returns and for failing to disclose a foreign bank account to the IRS. Rosales allegedly failed to report the receipt of at least $12.5 million in income from the sale of works purported to be by celebrated abstract expressionist artists. Most of the income was received in a bank account in Spain that Rosales hid from, and failed to disclose to, the IRS. The allegations in this investigation illustrate a 'double-barreled' tax evasion scheme: disguising who was actually selling the art and profiting from the sales, through the creation of a fictitious seller and the use of the name of a collector not associated with the transactions, and further concealing the proceeds by depositing them in an unreported foreign bank account.

Tip of the Day

Vacation home market . . . Some vacation home markets are starting to heat up again. Some of them are the same ones that were hot before the housing bust--some aren't. Is it time to jump in? You're on safer ground if there's something special about the location. Lake front or beach front property seems to almost always be in demand and it's limited in availability. But long-term pricing isn't guaranteed in all cases. Some lakes have shrunk and beach front in some areas has become less attractive because of hurricanes. Property near a theme park, one within a reasonable distance of a major city, those with a great view, will do better than run-of-the-mill properties. While there's a good chance you'll see price appreciation, in most cases you shouldn't consider it an investment. Generate rental income to offset costs? Again, much depends on the property. There are homes in the Hamptons that rent for $500,000 (and more) for the season; there are other locations where you'll be lucky to cover a fraction of your real estate tax bill. Get good advice before buying. That's doubly important if you need rental income.

May 24, 2013

News

The IRS has announced that interest rates will remain the same for the calendar quarter beginning July 1, 2013, as in the prior quarter. The rates will be:

• three (3) percent for overpayments (two (2) percent in the case of a corporation);
  
• three (3) percent for underpayments;
  
• five (5) percent for large corporate underpayments; and
  
• one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

The IRS is reminding (IR-2013-54) U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2012, that they may have a U.S. tax liability and a filing requirement in 2013. The filing deadline is Monday, June 17, 2013, for U.S. citizens and resident aliens living overseas, or serving in the military outside the U.S. on the regular due date of their tax return. Eligible taxpayers get two additional days because the normal June 15 extended due date falls on Saturday this year. To use this automatic two-month extension, taxpayers must attach a statement to their return explaining which of these two situations applies. See U.S. Citizens and Resident Aliens Abroad for additional information additional information on extensions of time to file. Nonresident aliens who received income from U.S. sources in 2012 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens can be April 15 or June 17 depending on sources of income. Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets.

Because of the current budget situation, the IRS plans to close on May 24, June 14, July 5, July 22 and Aug. 30. The Modernized e-File (MeF) system will not be available on these dates. For all of these dates, the MeF system (Production and ATS environments) will be unavailable from 10:00 p.m. ET the prior day until 9:00 a.m. ET the following day. For example, when the closure falls on a Friday, the system will be unavailable from 10:00 p.m. on Thursday until 9:00 a.m. on Saturday. For more information go to the Modernized e-File Status Page.

Tip of the Day

Selling your business? . . . Beware of claw backs. The contract may require you to put a portion of the selling price in escrow in the event one or more of the terms of the contract haven't been met. For example, your financials show inventory of $165,000 but the buyer later finds that some of the inventory was missing and another portion was damaged but carried at full value. It could be certain key individuals left within the first year or first-year sales for the buyer didn't reach the agreed-upon level. While the buyer is certainly entitled to full value if he's paying full price, contract clauses that provide for contingent payments or claw backs can invite controversy that can be difficult to settle. Make sure any guarantees or contingencies are properly defined and easily measured. And make sure your attorney knows all the facts. But even with no guarantees, you can still be sued if you've committed fraud by misrepresenting the health of the company.

May 23, 2013

News

You stand a better chance of convincing the IRS that you engaged in an activity with the purpose of making a profit if you've succeeded at other businesses. But that didn't help in Edmond Audrey Heinbockel et ux. (T.C. Memo. 2013-125). The IRS looked at three activities in which the taxpayers had losses--an airplane chartering operation, a lending activity, and grape farming. The airplane chartering business was an outgrowth of a profitable business. The taxpayer needed the airplane (he bought a high-performance single-engine) for business travel. The idea was to rent it to the business and to pick up additional income from other renters. Trouble was he only occasionally flew the plane on business-related trips (he mostly used commercial airlines) and was unable to generate much outside income. In addition, the business had cash-flow problems and often did not pay for the use of the plane. The aggregate net loss for the three years at issue totaled $210,000. The Court looked at the factors usually considered in deciding whether an activity was undertaken with a profit motive and found that the airplane chartering business was a not-for-profit activity. Losses from the grape farming activity were also disallowed. Here the Court found that the taxpayers' activity had not yet risen to the point of being a trade or business. In order to be a trade or business, the business must have begun operations. The taxpayers had not planted a single vine. Thus, all the expenses the taxpayers incurred should have been deferred under Section 195 until an active trade or business began. Since the taxpayers sold the property without ever beginning business, the costs should have been capitalized and added to the basis of the property for computing gain or loss.

Tip of the Day

Collectibles as investments? . . . Sounds like an easy way to amass a fortune. Buy artwork, autographs, rare books, a 1969 Camaro, or any number of other collectibles. But the approach isn't as foolproof as some people think. First, not every collectible goes up consistently; some move in cycles. Some common collectibles that were worth big money in the early 90's won't command half that amount today. And vice versa. Second, old doesn't mean it's valuable. Often it's a combination of old, rare, in excellent condition, and in favor. Third, you've got to buy from the right source. A rare find at a flea market could be a great investment. Buying from a dealer often means waiting a long time to recover your investment. Fourth, the market can be very illiquid. That means you may not be able to get the best price when you want to sell. Fifth, buy low and sell high doesn't always work. You don't have to overpay for more than one or two items to offset the gain on a number of others. Sixth, if you do have a gain, it could be taxed at 28% rather than the lower capital gain rates applied to most investments. Having said all that, investing in collectibles can be rewarding from a personal as well as a monetary standpoint. Do your homework, learn the market, and start slow. Until you become an expert, keep the investment to a very small portion of your portfolio. Collecting may be a lot of things, but if you think it's the road to retirement, you're on the wrong street.

May 22, 2013

News

After Monday’s devastating tornado in Moore and Oklahoma City, the IRS announced (IR-2013-53) it provided tax relief to individuals and businesses affected by this and other severe storms occurring in parts of Oklahoma. The IRS announced that affected taxpayers in Cleveland, Lincoln, McClain, Oklahoma and Pottawatomie counties will receive special tax relief. Other locations may be added in coming days based on additional damage assessments by FEMA. The tax relief postpones various tax filing and payment deadlines that occurred starting on May 18, 2013. As a result, affected individuals and businesses will have until Sept. 30, 2013 to file these returns and pay any taxes due. This includes the June 17 and Sept. 16 deadlines for making estimated tax payments. A variety of business tax deadlines are also affected including the July 31 deadline for second quarter payroll and excise tax returns and the Sept. 3 deadline for truckers filing highway use tax returns. The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The agency automatically provides this relief to any taxpayer located in the disaster area. Taxpayers need not contact the IRS to get this relief. Beyond the relief provided to taxpayers in the FEMA-designated counties, the IRS will work with any taxpayer who lives outside the disaster area but whose books, records or tax professional are located in the areas affected by these storms. All workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization also qualify for relief. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either last year’s or this year’s return. Claiming these casualty loss deductions on either an original or amended 2012 return will get the taxpayer an earlier refund but waiting to claim them on a 2013 return could result in greater tax savings depending upon other income factors. In addition, the IRS is waiving failure-to-deposit penalties for federal payroll and excise tax deposits normally due on or after May 18 and before June 3 if the deposits are made by June 3, 2013. Details on available relief can be found on the disaster relief page on IRS.gov.

Tip of the Day

Fix up house? . . . In a housing market where inventory is tight there's a tendency to buy a house that needs "TLC" (that's sometimes real estate speak for "this place has to be gutted"). Buying a $200,000 property and spending $200,000 in major repairs and additions doesn't mean you have a $400,000 house. Some additions will add substantial value; some won't. Gutting and structural work can be expensive (especially on an older home) that's recouped only in part. Bringing a property up to code can not only be expensive, but time consuming. You've got a better chance of making it pay if you can do some of the work yourself--drywall, painting, tile, etc. If you've got to call an electrician to replace a light switch, run the numbers a second time before buying. There are exceptions. A run-down home with a spectacular location is a good example. Get sound, independent advice (consider a buyer's agent), and don't let your emotions control.

May 21, 2013

News

The IRS and the Justice Department announced Michael George Fitzpatrick, 51, of Hope, Idaho, was sentenced to 42 months in prison in a U.S. District Court. Fitzpatrick was also ordered to serve three years supervised released and to pay just under $1.4 million in restitution to the IRS for unpaid individual and corporate federal income taxes. Fitzpatrick was convicted of two counts of tax evasion in January 2013 by a Coeur d'Alene, Idaho, jury. A previous jury had convicted him in September 2012 on two counts of failure to file corporate income tax returns but was unable to reach verdicts on the tax evasion counts. Fitzpatrick was remanded into custody immediately after the second trial. According to the indictment and evidence introduced at both trials, Fitzpatrick operated a business selling products which purported to help individuals eliminate credit card debt. During 2003 and 2004, gross sales from the business, operating under the names Dynamic Solutions Inc. (DSI) and North American Educational Services Inc. (NAES), exceeded $9 million. At trial the government proved the corporations failed to report $3.7 million and Fitzpatrick himself failed to report over $500,000 in income, resulting in a total tax loss of $1,397,762. The evidence further established that Fitzpatrick last filed an individual income tax return in 1996. At trial, Fitzpatrick argued at length that the income tax laws did not apply to him. However, the evidence showed he expended significant time and expense to put all of his property in the names of nominees. The evidence at trial also established Fitzpatrick sent over $5 million offshore to a bank located in the Dominican Republic. Fitzpatrick accessed this money through the use of a debit card and through wire transfers. During this two-year period Fitzpatrick used over $1 million of his money hidden offshore to buy real estate and to gamble in Las Vegas on nine separate trips to the Bellagio Casino. He also paid a contractor to build a schoolhouse for his kids in his backyard in Hope, Idaho.

Tip of the Day

Children getting summer jobs? . . . If this is their first real summer job they should keep in mind that they will be subject to Federal income taxes if their earnings exceed the standard deduction ($6,100 for 2013). More than likely they won't be able to claim a personal exemption since you'll be claiming them. They should complete Form W-4 and submit it to their employer when starting the job. If they're self employed (have their own business landscaping, painting, etc.), they'll be subject to the self-employment tax (15.3%) on 92.35% of their income if their earnings exceed $400. State rules vary widely, but in many cases standard deductions or exemption amounts are lower than for Federal purposes.

May 20, 2013

News

The IRS has announced that fee amounts collected for scheduled registered tax return preparer test appointments canceled due to the court ordered injunction are being refunded. Additionally, fees collected from return preparers who tested on or after January 18, 2013, the date the test was enjoined, are also being refunded. No additional refund or reimbursement requests related to registered tax return preparer regulation are being provided or considered at this time. E-mail notifications will be provided to those receiving refunds to explain the process. No action is necessary to receive the refund. A credit for the test fee will automatically be made to the account used to pay the fee. It is anticipated that all refunds will be processed by July 19, 2013.

Tip of the Day

Appearance counts . . . You may be the best service provider in your county, but you may not have maximized your business if you present a lousy appearance. Fred is a great plumber, but his truck looks like it was just salvaged from a hurricane. His existing customers don't care, but he's not picking up new business when he rides around town with his name emblazoned on the side. Sue's garden center provides care instructions for plants. But they're 12th-generation copies from a lousy, generic original. Worse, they show a revision date from some 10 years ago. Replacing Fred's truck won't be cheap so that's not a snap decision (although a wash job makes sense); Sue's instructions won't cost much. In fact, for little additional cost she could add her logo and make the instructions into a marketing tool. Unfortunately, sometimes appearance can mean more to a customer than the quality, price, etc. of the actual service or product.

May 17, 2013

News

Victims of severe storms, straight-line winds, and flooding that began on April 16, 2013 in parts of Illinois may qualify for tax relief from the IRS. The President has declared Cook, DeKalb, DuPage, Fulton, Grundy, Kane, Kendall, Lake, LaSalle, McHenry and Will counties a federal disaster area. Individuals who reside or have a business in these counties may qualify for tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after April 16, and on or before July 1, have been postponed to July 1, 2013. This includes the June 17 deadline for second quarter estimated tax payments. In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after April 16, and on or before May 1, as long as the deposits were made by May 1, 2013.

In Lawrence F. Peek et ux. et al. (140 T.C. No. 12) the taxpayers (two couples) established traditional IRAs. They formed FP Corp. and directed their new IRAs to use rolled-over cash to purchase 100% of FP Corp.'s newly issued stock. The taxpayers used FP Corp. to acquire the assets of AFS Corp. They personally guaranteed loans of FP Corp. that arose out of the asset purchase. In 2003 and 2004 they undertook to roll over the FP Corp. stock from their traditional IRAs to Roth IRAs, including in the taxpayers' income the value of the stock rolled over in those years. In 2006 after the FP Corp. stock had significantly appreciated in value, they directed their Roth IRAs to sell all of the FP stock. The taxpayers' personal guaranties on the loans of FP Corp. persisted up to the stock sale in 2006. The IRS contends that the taxpayers' personal guaranties of the FP Corp. loan were prohibited transactions, and, as a result, the gains realized in 2006 and 2007 from the 2006 sales of FP stock should be included in the taxpayers' income. The Court held that each of the taxpayers' personal guaranties of the FP Corp. loan was an indirect extension of credit to the IRAs, which is a prohibited transaction; and under Sec. 408(e), the accounts that held the FP Corp. stock ceased to be IRAs. The Court also held that the gains realized on the sale of the FP Corp. stock are included in the taxpayers' income. Finally, the Court held that the taxpayers are liable for the accuracy-related penalty under Sec. 6662.

Tip of the Day

Summer vacation . . . No not yours, your employees'. Do you have a company policy? Shut down for two weeks or try to maintain operations with a reduced staff? If operations are not shut down, most large companies require employees to put in their request for time soon after the first of the year. With summer fast approaching, if you haven't begun scheduling employees' time, you should do so now. Who gets first shot? Often it's based on seniority, but other methods are also used. To avoid bad feelings you should have a company policy.

May 16, 2013

News

The statute of limitations is suspended in the case of fraud. In Frank I. Bohannon et ux. (T.C. Memo. 2013-122) the IRS contended that the period to assess the taxpayers' tax liabilities relating to the years in issue remained open because they filed false or fraudulent returns with the intent to evade tax. The IRS contended the taxpayer-husband, a certified tax practitioner, deliberately classified personal expenditures as business expenses. He credibly testified that he did not pay close attention to how his wife classified the expenditures. The Court found that while his reliance on his wife's classifications may have been imprudent, it was not, as the IRS contended, "willful blindness". The Court also noted the taxpayers maintained meticulous records, rarely used cash, and did not conduct their businesses in a manner designed to conceal income. While the taxpayers made mistakes recording their expenditures, they did not intend to evade tax, and were not liable for fraud penalties pursuant under Section 6663.

In Danny Lane (T.C. Memo. 2013-121) the IRS rejected an offer-in-compromise by the sole proprietor of a construction business. The taxpayer argued that the IRS improperly calculated his reasonable collection potential by including the full amount of receivables as an asset despite the fact that subcontractors had mechanics liens on 90% of the amount and failed to consider economic hardship. The Tax Court found several flaws in the IRS's procedures and agreed with the taxpayer that the Service did not consider the taxpayer's economic hardship. The Court denied the IRS's motion for summary judgment and remanded the case to the Appeals Office for clarification and for further consideration.

Tip of the Day

Client retention . . . Do you track it? Computers have made it much easier to track how long a client, patient, or customer has been using your service or buying from you. If you're not tracking the information, you should start doing so. The information is generally valid only on a longer-term basis so how long you've been in business has to be factored in. But once you've got the information you can determine how long you tend to keep customers. Then watch the trend. Hopefully it's increasing. If not, you should find out why not and try to correct the trend. There are two important reasons. First, it's cheaper to retain a customer than find a new one. Second, if they're not returning, something's wrong. It could be your product or service isn't as relevant, or you're not as competitive on price or performance, etc. There's another reason. If you're selling the business you'd like to be able to say boast about customer retention since it'll increase the value of your business.

May 15, 2013

News

In Judith T. Marzullo (T.C. Memo. 2013-120) the Court refused to grant the taxpayer innocent spouse relief noting the taxpayer received a significant benefit relating to the unpaid tax liabilities (she received a large life insurance proceeds on the death of her husband), the taxpayer did not make a good-faith effort to comply with the Federal income tax laws, and she had reason to know her husband would not pay the Federal income tax liabilities.

In Kelly A. Cutler (T.C. Memo. 2013-119) the Tax Court granted the ex-wife of a dentist equitable innocent spouse relief. The Court noted the husband had not addressed his financial duties with respect to his dental practice and his wife tried to salvage the practice after he left. The Court noted her efforts to stabilize the practice with the hiring of a dentist, enlisting a consultant, etc. The Court also noted her ex-spouse's failure to pay required child support. The Court, however, found it could not return levied funds to the taxpayer under Sec. 6015(g) since they were neither a refund of taxes paid or a credit. The Court also noted it did not have jurisdiction over the issue of wrongful levy as exclusive jurisdiction lies in the District Courts.

Tip of the Day

Don't limit purchases to usual vendors . . . Hardware store or big box hardware outlet? Which one is cheaper? Maybe neither one. You need a standard 50-foot garden hose for the shop. The big box store will probably have a lower price than your local hardware store. But your local warehouse club could have a lower price than either one. The same is likely to be true of office supplies. The downside? The club is likely to have a limited selection. Still, items such as batteries, ink and toner, etc. could be significantly cheaper. Keep a shopping list of items you frequently purchase and those where you can plan your purchase and take down prices when you're in the store.