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November 30, 2015
In Fleming Cardiovascular, P.A. (T.C. Memo. 2015-224) the IRS issued a final revocation letter to the taxpayer on February 12, 2013, determining that the Employee Stock Ownership Plan (ESOP) and the ESOP trust failed to qualify under Sections 401(a) and 501(a), respectively, for plan years ending December 31, 2004 through 2010 because: (1) the ESOP was not operated in accordance with the terms of the original plan document; (2) the taxpayer failed to make recurring and substantial employer contributions; and (3) a participant's annual additions exceeded the limitations prescribed by Section 415. The IRS retroactively revoked the favorable determination letter that had been issued on June 1, 2005. The taxpayer filed a petition with the Tax Court pursuant to Section 7476 and Rule 210 seeking a declaratory judgment sustaining the continuing qualification of the ESOP and its trust. The Court noted a Section 415 failure is a continuing failure that disqualifies the plan for all subsequent plan years. The Court did not find that the IRS['s determination was unreasonable, arbitrary, or capricious. It held the IRS did not abuse his discretion in determining that the ESOP was not qualified under Section 401(a), and that the ESOP trust was not exempt under Section 501(a), for the plan year ending on December 31, 2004, and all subsequent plan years. It further held that it was not an abuse of discretion to revoke the favorable determination letter issued to the ESOP on June 1, 2005.
Tip of the Day
Liquidating stocks for a purchase? . . . If you've got to liquidate some of your portfolio to make the downpayment on a property, don't wait till the last minute. The lender will check on where the downpayment is coming from. Cash in the bank carries more weight than stocks in a portfolio. The lender is likely to see the value of the portfolio as a percentage (e.g., 70%) of cash--and they won't put a higher value on it simply because you've got a bunch of blue chips. You want to have your finances in order to avoid any questions. Another point, liquidating at the last minute could mean holding up the closing. And don't forget to factor in the tax you'll have to pay on the gain. You may want to sell additional stock to have the funds to pay the tax.
November 27, 2015
A business can write off losses from the abandonment or loss of property. In Randy Steinberg et ux. (T.C. Memo. 2015-222) the taxpayer bought a business that included a contract that gave the taxpayer the exclusive right to tow cars for a local police department. The taxpayer amortized the contract over 15 years, but the contract expired at the end of 5 years and the taxpayer wrote off the unamortized amount. The Court noted that the taxpayer retained the rights to tow and store vehicles after the expiration of the contract and until a new one was signed. Moreover, the taxpayer's rights to tow and store vehicles during that period was ratified by the ratification clause in a subsequent contract. The Court disagreed with the taxpayer that application of the willing buyer/willing seller standard under Sec. 20-2031-1(b) of the Estate Tax Regs. would render the contract valueless on expiration. Moreover, the requirement of a closed and completed transaction under Reg. Sec. 1.165-1(b) was not met.
Tip of the Day
Buying a stock for dividends? . . . Often a good idea. Good companies that have a history of dividend increases can provide good returns in the long run. Because they're usually more established companies their growth potential may be muted, but the combination of higher dividends and a higher price in the future often results in an attractive return. Another plus--they tend to be less volatile in a down market. But buying a stock with a high yield can be dangerous. The market may be pricing the stock with the assumption the dividend will be cut. If most stocks are yielding 2-4%, one yielding 6% should be suspect.
November 25, 2015
The IRS has announced (Notice 2015-82) (IRB 2015-50) simplified paperwork and recordkeeping requirements for small businesses by raising from $500 to $2,500 the safe harbor threshold for deducting certain capital items. The change affects businesses that do not maintain an applicable financial statement (audited financial statement). It applies to amounts spent to acquire, produce or improve tangible property that would normally qualify as a capital item. The new $2,500 threshold applies to any such item substantiated by an invoice. As a result, small businesses will be able to immediately deduct many expenditures that would otherwise need to be spread over a period of years through annual depreciation deductions. The IRS noted that the cost of many commonly expensed items such as tablet-style personal computers, smart phones, and machinery and equipment parts typically surpass the $500 threshold. The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible businesses by not challenging use of the new $2,500 threshold in tax years prior to 2016.
The IRS has published Health Care Tax Tip 2015-77, Transition Relief Under Employer Shared Responsibility Provisions. The tip describes the transition relief available to applicable larger employers (ALEs) with fewer than 100 full-time employees.
In Christopher McMullen (T.C. Memo. 2015-219) before the case was called for trial, the parties reached a settlement and filed with the Court a stipulation of settled issues. The stipulation stated that the settlement resolved all issues in the case, and the Court gave the parties 60 days to file decision documents. The IRS obtained tax computations consistent with the settlement and sent the taxpayer a proposed decision document based on those computations. The taxpayer disagreed with the IRS's computations and declined to sign the decision document. The taxpayer contended that there was no "meeting of the minds" regarding the settlement. According to the taxpayer, the tax computation that would result from the stipulation of settled issues was "one of the most essential aspects of the settlement." Because there allegedly was no agreement as to the essential terms of the settlement, the taxpayer asserted that "there was no objective manifestation of mutual assent or ‘meeting of the minds’" and hence that no settlement was reached. The Court disagreed finding the stipulation of settled issues was a binding contract involving mutual concessions, and it finally resolved all substantive tax issues in this case. Disagreement about the tax computations resulting from the settlement does not relieve either party of the concessions he made in exchange for the other party's concessions.
Tip of the Day
Don't put off billing . . . You may think that you're doing customers a favor by delaying billing, particularly for those customers you know are having financial difficulty. That may be poor reasoning. Most customers want to get the bill so they know the amount and can budget, even if they won't be able to pay immediately. It's also important to you should the customer declare bankruptcy.
November 24, 2015
The Social Security Administration (SSA), matches wage and withholding information sent by employers to tax returns filed by those employers with the IRS to identify discrepancies between the information submitted to each agency. The SSA’s primary focus is to identify discrepancies in which earnings and tax withholdings reported to the IRS on filed tax returns differs from amounts reported on Forms W-2, Wage and Tax Statement, submitted to the SSA. A discrepancy can indicate that employees’ earnings were not credited to their Social Security account. The SSA refers unresolved discrepancy cases to the IRS because the IRS has the authority to penalize an employer if the employer fails to file complete and accurate Forms W-2 and W-3, Transmittal of Wage and Tax Statements. The Treasury Inspector General for Tax Administration (TIGTA) did an audit the objective of which was to evaluate the IRS’s processes and procedures for working SSA Combined Annual Wage Reporting discrepancy cases. TIGTA found that the IRS did not always assess penalties against employers that did not reply to the IRS’s requests to resolve SSA-reported discrepancies as required. TIGTA’s analysis of discrepancy cases referred to the IRS by the SSA for Tax Year 2011 found that the IRS did not correctly assess more than $200 million in penalties on 32 employer discrepancy cases referred by the SSA. A comparison of wages and withholding reported by these 32 employers on their tax return to Forms W-2 submitted to the SSA identified underreported Forms W-2 wages totaling more than $2 billion. IRS management indicated that no process was established to identify these cases and, as a result, the penalties were not assessed as required. In addition, TIGTA’s analysis of discrepancy cases identified that the IRS excluded 22,814 of the 134,937 cases referred from the SSA. Of the 22,814 referred cases, 608 did not meet the IRS’s case processing exclusion criteria and were erroneously excluded from being worked. As a result, the IRS did not assess more than $22 million in penalties. A comparison of wages and withholding reported by employers on their tax return to Forms W-2 submitted to SSA for these 608 cases identified underreported Forms W-2 wages totaling more than $225 million. As part of a settlement agreement resulting from a lawsuit to force prompt resolution of the backlog of unreconciled cases (i.e., wage information was not being timely recorded to earnings records), the IRS is required to work all cases referred by the SSA. IRS management indicated that the 608 cases were erroneously excluded because of computer programming errors. TIGTA recommended that the Commissioner, Small Business/Self-Employed Division (1) develop a process to identify and ensure that penalties are assessed as required on those employers that do not reply to the IRS’s requests for missing Forms W-2, and (2) correct computer programming errors to ensure that cases are accurately reflected in open inventory as needing to be worked and that penalties are assessed when appropriate. To view the report,go to www.treas.gov/tigta/auditreports/20 15reports/201540090fr.html.
The IRS has set up a new web page www.irs.gov/uac/IRS-Security-Awareness-Tax-Tips with tips on how to protect yourself from identity theft, phishing, etc. Many of the tips apply to nontax issues. The first tip in the series, Seven Tips to Protect Your Computer Online can be seen at www.irs.gov/uac/Seven-Tips-to-Protect-Your-Computer-Online.
You may be required to substantiate almost any expense on your tax return. In Marie Beaubrun (T.C. Memo. 2015-217) the Tax Court sided with the IRS in disallowing the American Opportunity Tax Credit because the taxpayer offered no evidence she paid any tuition and related expenses during the year at issue.
Tip of the Day
Contract for professional, not just for company . . . If you're hiring a consulting firm, you generally do just that. If a professional working on your project leaves the company, you may be stuck with someone you don't have confidence in or, worse, can't work with. If you believe a certain individual is critical to the success of the job, consider a clause that allows you to back out of or otherwise modify the contract if he quits.
November 23, 2015
The IRS has issued proposed regulations (REG-134219-08) relating to relief from joint and several liability under Section 6015 of the Code. The regulations reflect changes in the law made by the Tax Relief and Health Care Act of 2006 as well as changes in the law arising from litigation. The regulations provide guidance to married individuals who filed joint returns and later seek relief from joint and several liability.
Notice 2015-81 (IRB 2015-49) advises how the Treasury Department and the IRS intend to respond to comments by revising three provisions of the proposed regulations under Sec. 529A (ABLE accounts) when those regulations are finalized. Specifically, commenters noted that the following three requirements for qualified Achieving Better Life Experience (ABLE) programs in the proposed regulations would create significant barriers to the establishment of such programs: (1) the requirement to establish safeguards to categorize distributions from ABLE accounts, (2) the requirement to request the taxpayer identification number (TIN) of each contributor to an ABLE account, and (3) the requirements for disability certifications, and in particular the requirement to process disability certifications with signed physicians’ diagnoses. The IRS has announced three changes to the proposed rules for (ABLE) accounts for eligible disabled individuals that will be included in the final regulations when issued. These changes will make it easier for states to offer and administer ABLE programs. They include:
Tip of the Day
Placed in service . . . When it comes to depreciation and Section 179 expensing, the critical date is "placed in service". Roughly, it's when the equipment is available for use in the business or for the production of income. For example, you order a new machine at the beginning of November but the machine isn't delivered until January 4 of the following year. You can't begin to take depreciation until January. Now assume the machine is delivered December 15, but a company technician to supervise installation and perform tests before the machine can be used. That doesn't happen until January 7. The machine is placed in service in January. Further assume the equipment is delivered, in place and tested by December 23th. A snowstorm closes the factory and the company shuts down between Christmas and New Year. The machine was available for use in December so it's considered placed in service in December. Passage of title or having the equipment in your possession doesn't mean it's placed in service. Keep that in mind when making year-end purchases. In the case of a rental property it's when the property is available for rent. Minor work such as putting down carpet on a finished floor won't hold up depreciation; lack of heat or essential appliances would.
November 20, 2015
Revenue Procedure 2015-56 (IRB 2015-49) provides certain taxpayers engaged in the trade or business of operating a retail establishment or a restaurant with a safe harbor method of accounting for determining whether expenditures paid or incurred to remodel or refresh a qualified building are deductible under Sec. 162(a) of the Code, must be capitalized as improvements under Sec. 263(a), or must be capitalized as the costs of property produced by the taxpayer for use in its trade or business under Sec. 263A. This revenue procedure also provides procedures for obtaining automatic consent to change to the safe harbor method of accounting permitted by this revenue procedure.
Notice 2015-79 (IRB 2015-49) describes regulations that the Treasury Department and the IRS intend to issue that will address transactions that are structured to avoid the purposes of Section 7874 (inversion transactions) by requiring the foreign acquiring corporation to be a tax resident in the relevant foreign country in order to have substantial business activities in the relevant foreign country;
Notice 2015-79 also describes regulations that the Treasury Department and the IRS intend to issue that will address certain post-inversion tax avoidance transactions by defining inversion gain for purposes of Section 7874 to include certain income or gain recognized by an expatriated entity from an indirect transfer or license of property and providing for aggregate treatment of certain transfers or licenses of property by foreign partnerships for purposes of determining inversion gain; and requiring an exchanging shareholder to recognize all of the gain realized upon an exchange of stock of a controlled foreign corporation (CFC), without regard to the amount of the CFC’s undistributed earnings and profits, if the transaction terminates the status of the foreign subsidiary as a CFC or substantially dilutes the interest of a United States shareholder in the CFC.
In Alice Ellis, Individually and on Behalf of May & Company, LLP Plaintiff (U.S. District Court, S.D. Mississippi, North. Div.) the plaintiff sought to quash an IRS summons for her client's accounting records and give testimony with respect to an investigation of her client. The Court noted the plaintiff did not point to any authority where a summoned party, and not the taxpayer who was the subject of the IRS investigation, successfully quashed an IRS summons. In contrast, the United States cites cases from other districts where courts explicitly rejected the argument that summoned parties can bring a pre-enforcement action to quash a summons. The Court also rejected the taxpayer's argument that the documents were protected under the work- product doctrine and prepared for litigation. The Court noted the documents sought were bank statements, canceled checks, tax returns, etc. The Court ordered the summons enforced.
Tip of the Day
Saving on perks . . . You may think you can save some operating expenses by cutting perks--no more free coffee in the break room, no Christmas party, etc. Often the cutback won't save much, but will have a disproportionately large impact on employee morale. The impact is even greater if the business's owners and executives don't give up anything. There may be ways to cut back on perks, just make sure the savings more than outweigh the negative aspects.
November 19, 2015
The Treasury Inspector General for Tax Administration (TIGTA) conducts a review annually in response to continuing stakeholder interest in the analysis and trending of Collection and Examination function activities. The overall objective is to provide various statistical information regarding Collection and Examination function activities. In the review TIGTA found the IRS has faced declining funding levels in three of the last four fiscal years. These budget reductions resulted in decreases in the number of employees available to provide services to taxpayers and enforce the tax laws. Overall, IRS employment (all employees who are on permanent, temporary, and term appointments) has declined 15 percent from 107,622 in Fiscal Year (FY) 2010 to 91,018 in FY 2014. The number of enforcement personnel decreased by nearly 1,000 employees during FY 2014. As resources decreased, the IRS’s responsibilities have expanded. For example, in FY 2014, the IRS continued implementing tax-related portions of the Affordable Care Act and the Foreign Account Tax Compliance Act. Despite these challenges, total dollars received and collected (gross collections) increased for the fourth straight year to $3.1 trillion (a 6.8% increase) in FY 2014. Enforcement revenue collected also increased from $53.3 billion in FY 2013 to $57.1 billion in FY 2014 due, in part, to a relatively small number of large dollar examination cases. Tax return filings remained steady while gross accounts receivable increased to $412 billion. FY 2014 Collection function activities showed mixed results. The amount collected on delinquent accounts by both the Automated Collection System and the Compliance Services Collection Operations increased while the amount collected by Field Collection decreased. The Collection function continued to receive more delinquent accounts than it closed, although the number of delinquent accounts in the Collection queue decreased due, in part, to the removal of millions of accounts that were not resolved. While the use of levies increased, fewer Notices of Federal Tax Lien were filed and fewer seizures were made. Meanwhile, taxpayers’ use of the offer in compromise payment option decreased for the first time in the past five years. The Examination function conducted 11% fewer examinations in FY 2014 than in FY 2013. The decline in examinations occurred across almost all tax return types, including individual, corporation, and S corporation. Seventy-one percent of return examinations were conducted via correspondence. In addition to the decline in the number of tax return examinations, productivity indicators also declined. The dollar yield per hour for most return types decreased. Also, the no-change rates increased for most types of examinations (individuals, corporations, and partnerships). TIGTA made no recommendations in this report. To read the full report, go to www.treas.gov/tigta/auditreports/2016repo rts/201630004fr.html.
Rental real estate is by definition a passive activity. However, real estate activities engaged in by a "real estate professional" can be considered nonpassive. In order to qualify as a real estate professional you must spend more than 750 hours per year and your real estate activities comprise more than half of your total personal services time. In Carol A. and Roy E. Stanley (U.S. District Court, W.D. Arkansas, Fayetteville Div.) the IRS disallowed the taxpayer's claim to be a real estate professional on the grounds that his time working for an S corporation in which he had a 10% interest did not qualify as time as a real estate professional. The IRS claimed, using several arguments, that the taxpayer did not have the required minimum 5% interest in the business. The Court sided with the taxpayer in finding he did have the requisite interest based on the facts and evidence presented, The Court also found the taxpayer, having met the real estate professional requirement could group the rental activities with other trades or business because they represented an economic unit, despite some differences such as the operation of a golf course. The Court noted that the grouping restrictions cited by the IRS only applied to grouping activities for the purpose of determining material participation.
Tip of the Day
Big customers can be dangerous . . . You should be careful if a single customer accounts for a large portion of your business. No matter how good a relationship you have with him, you're at risk. Here are some disasters we've come across:
November 18, 2015
The IRS has announced (IR-2015-127) that it is requesting information about current professional employer organization practices in an effort to streamline the implementation of a new federal program. Under legislation enacted last December, the IRS must establish a voluntary certification program for professional employer organizations (PEOs). The law requires them to meet a number of requirements, including certain bond and independent financial review requirements. The IRS has been working to determine the procedures and information system changes necessary to implement the new law and plans to begin accepting applications for PEO certification on July 1, 2016. Currently, PEOs are subject to licensing, registration and other requirements in many states. In addition, there are private assurance organizations that offer PEOs accreditation if they satisfy certain requirements. The IRS is requesting information related to these state requirements and accreditation programs. Specific topics of interest include covered employees, financial audit practices, verification of payroll tax obligations, and working capital and net worth requirements. Further details on the specific topics and the process for submitting information are in the full text of the request for information.
In Wade Malhas (U.S. District Court, N.D. Illinois, East. Div.) the taxpayer had claimed he had no documents relating to an offshore account in response to a summons. The IRS presented evidence and affidavits the individual was the beneficial owner of the account and continued to access the account and had a power of attorney with respect to the account. The dismissed his claim of lack of signatory authority noting he had a password that allowed him to access the accounts. The Court ordered the summons enforced.
Tip of the Day
Victim of identity theft? . . . The IRS is taking aggressive steps to stop fraudulent returns before they are processed. Victims want to know more about the information used on the fraudulent returns using their Social Security number. A victim of identity theft or a person authorized to obtain the identity theft victim's tax information may request a redacted copy (one with some information blacked-out) of a fraudulent return that was filed and accepted by the IRS using the identity theft victim's name and SSN. Due to federal privacy laws, the victim's name and SSN must be listed as either the primary or secondary taxpayer on the fraudulent return; otherwise the IRS cannot disclose the return information. For this reason, the IRS cannot disclose return information to any person listed only as a dependent. Partial or full redaction will protect additional possible victims on the return. However, there will be enough data for you to determine how your personal information was used. To make the request, a taxpayer will need to prepare a signed letter with the certain information described and mail it to the IRS. Complete information can be found at Instructions for Requesting Copy of Fraudulent Returns.
November 17, 2015
The IRS is reminding (IR-2015-126) eligible employees to take full advantage of their employer’s health flexible spending arrangement (FSA) during 2016. FSAs provide employees with a way to use tax-free dollars to pay medical expenses not covered by other health plans and many employers are offering the option to participate during the 2016 plan year. Employees wishing to contribute to an FSA must make this choice for 2016, even if they contributed in 2015. For 2016 you can contribute up to $2,550. Amounts contributed are not subject to federal income, Social Security or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA. Generally, you must use any amounts before the end of the plan year (or lose them), however the law allows employers to choose to offer participating employees more time to spend their FSA funds either through the carryover option or the grace period option. Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year. For instance, an employee with $500 of unspent funds at the end of 2016 would still have those funds available to use in 2017. Under the grace period option, an employee has until 2 1/2 months after the end of the plan year to incur eligible expenses.
A bill has been introduced in the House (HR 3917; Charitable Automobile Red-Tape Simplification Act of 2015) that would change the substantiation rules for the donation of certain vehicles. While additional information would be required with a taxpayers return (e.g., a statement with respect to the make, model, year, and condition of the vehicle along with its VIN along with an estimate of the value from a "blue book" and would apply to vehicles valued at between $500 and $2,500.
Tip of the Day
Holiday gifts . . . If you want a deduction, they're limited to $25. Thus, if you give a customer a $40 bottle of wine, you can deduct only $25. That's not much in current times. But for customers, suppliers, etc. you may have other options. Dinner or a show around the holiday season for you and a customer isn't subject to the $25 rule. But only 50% is deductible. A holiday party for your employees and customers may be fully deductible, and help cement relationships.
November 16, 2015
Liens imposed by the IRS under Sec. 6321 arise at the time the tax assessment is made and continue until liability for the amount assessed, or a judgment against the taxpayer arising out of the liability, is satisfied or becomes unenforceable due to a lapse of time. Once properly attached, the liens remain on the property so long as they have not been satisfied or become unenforceable due to a lapse of time. A non-judicial sale of property occurs subject to and without disturbing a lien if the lien was filed more than 30 days before the sale, and the IRS was not given notice in writing, by registered or certified mail at least 25 days prior to the sale. That means a property can be sold with the IRS liens attached. That's what happened in Ismael Mendoza, Plaintiff v. Andrew L. Cisneros, AM Builders & Contractors Supply Co. Inc., Fowler & Peth Inc., City of Greeley, State of Colorado, and United States of America, Defendants (U.S. District Court, D. Colorado). The IRS filed lien notices with the Clerk and Recorder of Weld County, Colorado. The Court found the IRS had valid liens and that it did not receive effective notice of the sale. The Court held the Government could foreclose on the liens and receive first priority on the proceeds from the sale of the property.
Tip of the Day
Missed issues . . . Seems that everything in life is more complicated these days and everyone is a specialist. It may be up to you to make sure that a professional doesn't miss something. You go to a lawyer to draft a purchase agreement for some property. He also helps with the loan agreement. He knows you use a CPA for your business accounting and tax work so he assumes you'll get the CPA's opinion on some of the terms in the loan agreement. But you assume the attorney is in charge and you don't have to consult another professional. That can be a mistake. You can't blame the attorney here. The reverse can also be true. The smart move would be to ask the attorney if you should be discussing any portion of the agreement with your CPA.
November 13, 2015
You can't escape a lien by simply spending the money before the IRS (or other creditors) can get to it first. In Eric Edward Chandler (T.C. Memo. 2015-215) the taxpayer's unpaid Federal income tax liabilities exceeded $600,000. In a collection due process (CDP) hearing he submitted an offer in compromise (OIC) of $122 per month for 24 months, for a total of $2,938. The IRS rejected the offer, believing it was a delaying action. The IRS requested how he spent funds of some $400,000 withdrawn from retirement accounts in 2006, 2007, and 2008. In a CDP hearing the Settlement Officer(SO) informed him that he was ineligible, in light of his income, to have his account placed in currently not collectible (CNC) status. The officer informed him that his OIC was unacceptable because he would be treated as having dissipated, and thus as continuing to own for OIC purposes, the assets he had withdrawn from his retirement accounts during 2006-2008. The taxpayer was evasive when asked how he had spent this $400,000. The taxpayer failed to accept an OIC from the IRS and the SO decided that the case should be closed. She determined that the taxpayer's OIC had to be rejected because his reasonable collection potential (RCP), including his dissipated retirement account assets, was $518,579, in contrast to his offer of $2,938. The Court noted the record established the SO analyzed the transcript of the taxpayer's account, determined the liabilities were properly assessed, and determined applicable law and procedures were followed. The Court noted the Internal Revenue Manual instructs the SO to determine whether a taxpayer has dissipated assets. The Court held the IRS did not abused its discretion in rejecting the taxpayer's OIC.
Substantiation is critical, in more than T&E and auto expenses. In Mark R. Smith et ux. (T.C. Memo. 2015-214) the taxpayer lost a number of claimed deductions because of inadequate documentation. The Court denied deductions for parking fees, tolls and transportation and for meals and entertainment. The Court denied a deduction for cost of goods sold for solar panels where the only documentation was a quote for 1,000 units with a bad date. The taxpayer claimed a home office deduction but provided only his testimony and a floor plan of the apartment with the area used for business shown. While he claimed he met with clients there, no testimony or other evidence from clients was presented at trial. The Court disallowed a deduction in excess of that allowed by the IRS. The taxpayer presented credit card statements and a personal loan to substantiate business interest paid. The Court denied a deduction because there was no evidence to show the use of the proceeds of the loans or credit card expenses.
Tip of the Day
Protective claim for refund . . . Generally, a protective claim is a formal claim or amended return for credit or refund normally based on current litigation or expected changes in tax law or other legislation. You file a protective claim when your right to a refund is contingent on future events and may not be determinable until after the statute of limitations expires. A valid protective claim does not have to list a particular dollar amount or demand and immediate refund. However, a valid claim must:
Mail your protective claim for refund to the address listed in the instructions for Form 1040X.
November 12, 2015
Legislation has been introduced that would curb corporate inversions, the moving of a U.S. corporations base of operations overseas to save taxes.
Identity theft not only affects individuals, it can also affect businesses. The IRS recognizes that new identity theft patterns are constantly evolving and, as such, it needs to continually adapt its detection and prevention processes. The Treasury Inspector General for Tax Administration (TIGTA) did a review to determine the effectiveness of the IRS’s efforts to implement a business return program to detect and prevent identity theft. TIGTA found that the IRS recognizes continued efforts are needed to develop and implement systemic processes to detect identity theft. To date, the IRS has taken actions that include defining business identity theft, creating procedures for IRS employees to follow when they are made aware of a potential business identity theft situation, and conducting a Business Identity Theft Project to detect potential business identity theft relating to corporate tax returns. However, TIGTA also found areas where improvements could be made in identifying potential business identity theft. For example, the IRS maintains a list of suspicious Employer Identification Numbers (EINs) determined to be associated with a fictitious business. TIGTA analysis of business returns filed during Processing Year 2014 identified that 233 tax returns were filed using a known suspicious EIN. Of these, 97 claimed refunds totaling over $2.5 million. In addition, TIGTA determined that processing filters could be developed to identify returns containing certain characteristics that could indicate potential identity theft cases. Business returns containing these characteristics could be proactively identified before the issuance of any refunds. TIGTA also found that State information sharing agreements do not address business identity theft. The agreements only address the detection of individual identity theft. Finally, TIGTA also identified that actions are needed to better promote awareness of business identity theft. TIGTA recommended that the Commissioner, Wage and Investment Division, establish procedures to identify business returns containing certain characteristics that could indicate potential identity theft cases, evaluate the potential for expanding information sharing agreements to include the sharing of suspicious or potentially fraudulent business tax return filings; and continue to develop and offer additional outreach materials that directly inform businesses about business identity theft. To see the complete report go to www.treas.gov/tigta/auditreports/2015reports/201540082fr.html.
In Gregory Martens (T.C. Memo. 2015-213) the Tax Court found the IRS did not abuse its discretion in relying on TXMOD transcripts to verify the IRS assessments. The Court also held that the taxpayer was not liable for the Sec. 6702, frivolous return, penalty for one of the years at issued. (The penalty is imposed if a taxpayer files a return which purports to be a return but doesn't contain the information necessary to assess a tax.) The Court noted the IRS bears the burden of proving a taxpayer liable for the penalty. The IRS did not introduce into evidence a copy of the taxpayer's return, nor did the IRS introduce into evidence any documents that proved by a preponderance of evidence that the taxpayer filed a document purporting to be a tax return.
Tip of the Day
Year-end portfolio review . . . It's not too early to start taking a serious look at your portfolio. This is one of, if not the most, important places to do tax planning. Whether it's taking gains to offset carryforward losses or selling losers to offset gains taken this year. Waiting till the last minute may mean missing out on current opportunities or rushing and not taking all factors into consideration. You can decide on stocks to sell and wait to pull the trigger. Always remember that investment decisions are paramount. We'll be publishing the next two of our year-end tax planning articles shortly.
November 10, 2015
In Jefferson Cartwright et ux. (T.C. Memo. 2016-212) the taxpayer was an orthopedic surgeon. He had a practice in Arlington, Washington but also worked as an on-call surgeon at a hospital some 25 miles away. As an on-call surgeon at the hospital he was required to work a 24-hour period three days a month.In emergency situations he might have to respond in as little as 5 minutes. He purchased a motor home and parked it in the hospital parking lot near the emergency room so that he could rest and sleep when not needed. Because the taxpayer suffers from very serious and chronic medical conditiions, he thought the motor home would help him better serve his patients. He also reviewed patient charts on his computer and referred to his medical books in the vehicle. The taxpayer maintained mileage logs for business and personal use of the vehicle. The IRS argued the allowable depreciation and Sec. 179 expenses should be allocated between business and personal use. The taxpayer contended the vehicle was used as a mobile office 85% of the time he was performing on-call duties for the three days per month in 2008 and 100% in 2009. The Court noted the vehicle was used only 27 days for business in 2008 and 36 days in 2009. The mileage logs showed business use of 19.42% and 22.23% for the two years. The Court held the IRS's calculation of business use was fair, reasonable, and correct.
Tip of the Day
Have residences in more than one state? . . . Generally, if you have a permanent place of abode in a state and claim to be a nonresident, you must be able to show you spent no more than 183 days in the state. Live in Florida nine months of the year but spend three months during the summer in your lake home in New York? Proving you didn't break the 183 day threshold might be relatively easy. On the other hand, if you're back and forth all year or spend more time in the state (New York in this case), you should have a log or diary and some collaborating evidence such as airline tickets, receipts from activities in the other state, etc. If you're approaching the magic 183 days and want to avoid residency status, you might want to reconsider trips into the state.
November 9, 2015
Notice 2015-77 amplifies Notice 2013-07 with respect to the Treasury Department’s Housing Finance Agency Innovation Fund for the Hardest-Hit Housing Markets (HFA Hardest Hit Fund) by extending through taxable year 2017 the safe harbor method for computing a homeowner’s deduction for payments made on a home mortgage and the relief for mortgage servicers and state housing finance agencies (State HFAs) from penalties relating to information reporting. In addition, this notice amplifies Rev. Proc. 2011-55 by extending its scope and effective date through calendar year 2017 for the HFA Hardest Hit Fund.
The IRS has released a new health care tax tip on understanding Form 1095-C required by the Patient Protection and Affordable Care Act. Employers with 50 or more full-time employees, including full-time equivalent employees, in the previous year use Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, to report the information required about offers of health coverage and enrollment in health coverage for their employees. Form 1095-C is used to report information about each employee. Employers that offer employer- sponsored self-insured coverage also use Form 1095-C to report information to the IRS and to employees about individuals who have minimum essential coverage under the employer plan. Go to HCTT-2015-72 for the full text.
Tip of the Day
Who's the real owner? . . . Just because you have bare legal title to an asset doesn't mean you're entitled to the tax breaks associated with it; and, conversely, not having full title may not prevent you from getting those breaks. The IRS looks at the "benefits and burdens" of ownership. Factors that indicate that a taxpayer has the benefits and burdens of ownership include:
November 6, 2015
The IRS is reminding business owners how critical it is to understand the various types of employment-related taxes they may be required to deposit and report. Fact Sheet FS-2015-25 provides information on some of the more common employment tax topics posed by business owners including:
The Treasury has concluded its pilot program and is launching the my RA retirement account. The program is designed to enable small savers to put money into a retirement account that has no fees and where there's no chance of losing money. There are three ways to put money in the account--direct deposit contributions through an employer, recurring or one-time contributions from a checking or savings account, or directing all or a portion of a federal tax refund to a my RA. The account is a Roth IRA with the same eligibility requirements but limited to a maximum balance of $15,000. For more information, visit myRA.gov.
If you don't keep adequate books and records, the IRS can reconstruct your income. That's what the Service did in Ronald Lawson and Karen Bey (T.C. Memo. 2015-211). The IRS also included in income insurance proceeds for damaged property because there was no documentation concerning an insurance policy and the claim submitted. The Court sided with the IRS on the reconstruction of income. The claimed the IRS's income analysis contained errors. The Court noted that mistakes in a bank deposits analysis do not necessarily invalidate the results. The Court also found the insurance proceeds were taxable because the taxpayers could not show that they were nontaxable. The Court also disallowed some expenses for lack of documentation.
Tip of the Day
Sales tax exemptions for fuel and power . . . If you're engaged in manufacturing, there's a good chance you're entitled to a sales tax exemption for electric, fuel, etc. used in the manufacturing process. Most states provide such an exemption. The rules vary, as does the definition of manufacturing. At least one state provides a limited exemption on sales tax on fuel used by any small business. Check the rules in your state.
November 5, 2015
In Stephen J. Dunn, et ux. (T.C. Memo. 2015-208) the taxpayer made a contribution to an IRA for 2008. Unfortunately, during the early part of the year he worked for an employer that provided a pension plan in which he was a participant. Thus, he was not entitled to a deductible contribution resulting in an excess contribution penalty. The taxpayers argued that the IRA contribution should be carried forward to the following year (during which the taxpayer already made a contribution). The Court noted that the proposed regulations say that a contribution shall be treated as made on account of [a] taxable year if it is irrevocably specified in writing to the trustee, insurance company, or custodian that the amounts contributed are for such taxable year). The proposed regulations include no suggestion that a contribution, once so designated, can be redesignated after the close of that tax year for a different tax year. In any event, because the taxpayer provided no evidence that he had ever submitted a redesignation request to the trustee, the Court did not have to decide whether that action would have been effective if it had been attempted.
Reliance on a tax professional may get you out of a penalty, but you've got to meet some requirements. In Lesley A. West, et al. (U.S. District Court, E.D. Virginia, Alexandria Div.), the petitioner claimed the estate tax return was filed late based on her reasonable reliance on the erroneous advice of counsel. The Court held that an email received by one of the plaintiffs was not legal advice as to the date of a filing or payment deadline. The language on which plaintiffs seize is the attorney's comment that this all takes as short as a few months or (if an estate tax return is required) as long as two years. The Court said this is insufficient as a matter of law to constitute legal advice as to tax filing or payment deadlines for several reasons. First, nothing in the record indicates that plaintiffs ever asked for a deadline, even before the email was sent. The attorney was not responding to a request for specific information about a deadline. Moreover, the email does not contain the language characteristic of advice as to deadlines, e.g., pay by, due on, or file within. Finally, there is no objective basis to determine from what date the attorney would even calculate a two-year deadline. That is, when the attorney stated that an estate tax process can take as long as two years, there is no indication of when the two-year period begins to run. Possible answers abound: the date of death, the date of the email, the date of final estate valuation, or perhaps other possibilities. The email's lack of clarity as to any deadlines underscores why it cannot qualify, from any objective standpoint, as legal advice about estate tax filing and payment deadlines.
Tip of the Day
Buy or lease? . . . There's no rule of thumb for all situations. And nonfinancial factors may be far more important than financial ones. Which is cheaper from a financial standpoint will depend on the interest rate (lease vs. buy) and the residual value. Some leases can be expensive. Ones where the manufacturer is holding the lease may be attractive. But other factors may loom larger. Technology driven equipment is becoming obsolete much faster than in the past. Do you want to be trying to sell a 3-year old computer you bought? Leasing means you can walk away at the end of term. The same can be true for vehicles, shop equipment, etc. On the other hand, an 8-year old forklift that you haven't abused may still be more than serviceable. On vehicles the deciding factor may be the excess mileage charge. There's one time when tax considerations may be important. Leasing autos and trucks may be more attractive than buying because of depreciation restrictions. But even there you should work through the numbers.
November 4, 2015
President Obama has signed the Bipartisan Budget Act of 2015 that keeps the government in business another two years. The new law will changed the treatment of partnership audits and eliminate the rule under Sec. 704(e) dealing with gifted partnerships. A partner with a gifted interest (typical in family partnerships) will be considered a partner, only if it would under current doctrines.
The IRS is now accepting applications for new and renewals of preparer tax identification numbers. For more information and to apply or renew, go to www.irs.gov/Tax-Professionals/PTIN-Requirements-for-Tax-Return-Preparers.
The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit of how the IRS deals with corporate net operating losses because of the increasing percentage of corporation returns filed reporting net operating losses and the potential impact of those net operating losses as carryforwards on future Federal corporation tax revenues. In Processing Year 2010, 45.3 percent of corporations filed returns claiming net operating losses of $722.4 billion incurred in the Great Recession. In Processing Year 2012, corporate returns reported $1.96 trillion net operating loss carryforwards available to offset future income tax. The objective was to evaluate IRS plans, activities, and programs to administrate the tax laws for corporate net operating losses and net operating loss carryovers. TIGTA recommended that the Chief Financial Officer include in the unaudited information for the IRS financial statements the amount, net present value, and description of the corporate net operating loss carryforward amounts’ impact on future corporate tax revenues. The full report is at www.treasury.gov/tigta/iereport s/2016reports/2016ier002fr.html.
If a taxpayer's position in Tax Court is frivolous or groundless, or institutes a proceeding as a delaying action, the Court can impose a penalty. In William D. Trumbly, Jr. et ux. (T.C. Memo. 2015-207) it was the taxpayers who argued that the Court should impose sanctions on the IRS because the Service's counsel knowingly concealed information from opposing counsel during discovery. The Court denied the motion for sanctions, finding the error was in the nature of a mistake and the IRS's conduct didn't rise to one of unreasonable and vexatious under either the bad faith standard or the reckless standard.
Tip of the Day
Social security changes . . . The Bipartisan Budget Act of 2015 puts an end to two Social Security filing strategies--file-and-suspend and restricted application for spousal benefits. Both strategies are popular and can allow a couple to receive benefits while allowing other benefits to increase based on benefit growth between age 66 and 70. The new rules won't be effective until six months from the date the Act is signed (yesterday), so you may still be able to take advantage of these approaches.
November 3, 2015
Tax payment or deposit? You may think what does it matter--the IRS has my money. But there's a difference when it comes to the statute of limitations. A deposit doesn't start the clock running, a payment does. In Noah B. Bolt et ux. (U.S. District Court, D. South Carolina) the IRS asserted the taxpayers did not file their claim for refund within the three-year limitations period from the time the taxpayer was paid. The taxpayers claimed the amount they paid was a deposit. The Court noted the taxpayers did not submit any written statement with the remittance designating it as a deposit. The Court held the amount received by the IRS was a payment and thus the statute had run.
You can't just file suit for a refund of taxes. You've got to file a claim with the IRS first. Only if the IRS denies the claim can you file suit. That was the situation in Brendan F. Kelly (U.S. District Court, D. New Hampshire). In addition, the Court held it did not have jurisdiction to grant injunctive relief because the allegations in the complaint did not show that the government could not ultimately prevail.
Tip of the Day
Cutting costs . . . While the discussion here is aimed at your individual expenses, in many cases it applies to your business as well. Chances are you don't have a budget. If you don't, finding cash sinkholes may be more difficult. Go for the big items first. That boat in the backyard (or at the marina) that you haven't used in three years, the vacation home you used twice last year, etc. There's money going down the drain in two ways--the upkeep such as insurance, maintenance, fees, loan payments, etc. is one. The other is that if you sell the item you'll generate cash to pay down credit card debt, student loan, etc. It may be a tough decision. You've had the boat since the kids were small and you really enjoyed it. But the kids are going to college and the boat costs you $6,000 a year with little or no use. It's a matter of priorities. Some items should be a family decision. Others you can make on your own. Your wife always wanted you to get rid of the motorcycle. Look for the high-dollar, easy targets first. There are probably more than you think. Look for contractual payments such as maintenance contracts on items you don't use. That gym membership may be a perfect example. In fact, you may be able to kill two birds with one stone. Cancel the gym membership and mow the lawn yourself. Make a list of monthly payments--those you pay and those that hit your credit card or bank account directly. A second telephone line for a rarely used fax machine might save $40 or more dollars a month. And, if you eat out frequently, cut back just one night a week. While you're at it look for hidden charges on your credit card statements. You should be able to save while not significantly affecting your lifestyle. Many of these apply to your business. You've got seven phone lines but most of your employees are in the field and have cell phones. That copier that hasn't been used in six months that you're still paying lease or maintenance charges on. If you've got employees make everyone come up with two cost saving suggestions. They may have ways to cut you would never have thought of.
November 2, 2015
The IRS has announced yet another update to the list of counties eligible for relief as a result of severe storms and flooding that began on October 1, 2015 in parts of South Carolina. The additional counties are Greenville and Spartanburg. At this time all the counties eligible for relief include Aiken, Bamberg, Berkeley, Calhoun, Charleston, Chesterfield, Clarendon, Colleton, Darlington, Dillion, Dorchester, Fairfield, Florence, Georgetown, Greenville, Greenwood, Horry, Kershaw, Lee, Lexington, Marion, Newberry, Orangeburg, Richland, Saluda, Spartanburg, Sumter and Williamsburg.
In >Estate of Edward S. Redstone, Deceased, Madeline M. Redstone, Executrix (145 T.C. No. 11) determined a gift tax deficiency against the estate of the deceased. The deceased worked in a family business with his father and his brother. This business was reorganized in 1959 as National Amusements, Inc. (NAI). Upon NAI's incorporation, the deceased's father contributed a disproportionate amount of capital, but the three were each listed as registered owners of 1/3 of NAI's shares. The deceased was eventually forced out of the business. Upon departure he demanded all of his stock, which his father refused to deliver. Citing the disproportionate capital contributions in 1959, his father insisted that a portion of the deceased's stock had been held since NAI's inception in an oral trust for the benefit of the deceased's children. After lengthy negotiations and the filing of two lawsuits, the parties in 1972 reached a settlement on advice of their respective counsel. Pursuant to the settlement, The deceased transferred 1/3 of the disputed shares into a trust for his children, in consideration of which the deceased was acknowledged as outright owner of 2/3 of the disputed shares, which NAI redeemed for $5 million. The IRS determined that deceased's transfer of stock for the benefit of his children was a taxable gift. While agreeing that the deceased transferred the stock in settlement of a bona fide dispute, the IRS contended that the transfer was not made in the ordinary course of business or for a full and adequate consideration in money or money's worth, because no consideration was furnished by deceased's children, the transferees of the stock. The Court held the transfer of stock was made in the ordinary course of business and for a full and adequate consideration in money or money's worth, namely, recognition by the deceased's father and brother that he was the outright owner of 2/3 of the disputed shares. The Court also held that the deceased received adequate consideration even though that consideration was not furnished by his children. Finally, it held the deceased did not make a taxable gift and is not liable for any gift tax for the period at issue.
Tip of the Day
Required minimum distribution . . . If you're over 70 you've probably been taking the required minimum distributions (RMDs) from your IRAs, pension plans, etc. But if you're just reaching that age, or just left a regular job with a plan, this may be new. You may know that you if you reached age 70-1/2 in 2015 (those born after June 30, 1944 and before July 1, 1945) you can delay that first distribution till April 1, 2016. But that will mean two RMDs will be taxable in 2016 (the delayed one and your 2016 RMD). The IRA trustee must provide you with the calculation of your RMD, but they can report it several ways, so watch carefully for correspondence from the trustee. And you shouldn't wait till the last minute. You don't want to be rushed. Picking the right stocks, mutual funds, etc. to sell to make the distribution can result in savings.
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