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News Releases and Fact Sheets
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IRS Written Determinations
May 14, 2008
News
Rev. Proc. 2008-29 (IRB 2008-22) provides the 2009 inflation adjusted amounts under Sec. 223(g) for Health Savings Accounts (HSAs). For calendar year 2009, the annual limitation on deductions for an individual with self-only coverage under a high deductible health plan is $3,000 (up from $2,900); the annual limitation on deductions for an individual with family coverage under a high deductible plan is $5,950 (up from $5,800). For calendar year 2009 a high deductible plan is a health plan with an annual deductible that is $1,150 ($1,100 for 2008) for self only coverage or $2,300 ($2,200 for 2008) for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $5,800 ($5,600 for 2008) for self-only coverage or $11,600 ($11,200 for 2008) for family coverage.
Revenue Procedure 2008-27 ( IRB 2008-21) provides a simplified method for taxpayers to request relief for certain late filings under sections 897 and 1445 of the Code. The provisions of this Revenue Procedure apply to certain nonrecognition transactions and transfers of domestic corporations that are not U.S. real property holding corporations.
Revenue Procedure 2008-26 (IRB 2008-21) outlines situations in which the IRS will not challenge certain securities as not being “readily marketable” under section 956(c)(2)(J). Because of current conditions in the credit markets, some securities that qualified for the exemption under 956(c)(2)(J) may appear subject to a potential subpart F inclusion and this revenue procedure provides temporary relief in such cases.
In IR-2008-71 the IRS is reminding small tax-exempt organizations of their new annual electronic filing requirement as the first filing deadline of May 15 approaches. Organizations can file by going to the IRS Web site at www.irs.gov/charities/article/0,,id=169250,00.html. Beginning this year, most organizations whose gross receipts are normally $25,000 or less must file Form 990-N, also known as the e-Postcard. Previously these small organizations did not have an annual filing requirement. The first e-Postcards are due by May 15, 2008, from small tax-exempt organizations whose tax year ended on December 31, 2007. For organizations with a tax year that ends after December 31, 2007, the e-Postcard is due by the 15th day of the 5th month after the close of their tax year. It is important for small organizations to file the e-Postcard because, under the Pension Protection Act of 2006, if an organization fails to file for three consecutive years it will lose its tax-exempt status. Some organizations do not have to file including organizations that are part of a group return, as well as churches, their integrated auxiliaries and conventions or associations of churches.
Tip of the Day
You can fool some of the people some of the time . . . Failure to deliver on sales promises can be deadly in the long run. You may be able to fool customers the first time; and fool some the second time; but eventually you'll lose your customer base if you don't deliver on your promises. This may sound obvious, but you'll be surprised how many times "smart" business owners violate the rule.
May 13, 2008
News
The IRS has announced (Announcement 2008-41, IRB 2008-19) it is withdrawing a notice of proposed rulemaking (REG-109367-06) relating to the circumstances in which accounts or notes receivable are acquired for services rendered within the meaning of Sec. 1221(a)(4). The IRS will not challenge return reporting positions of taxpayers under Section 1221(a)(4) that apply existing law, including Burbank Liquidating; Federal National Mortgage Association; and Bieldfeldt. See also Rev. Rul. 80-56 and Rev. Rul. 80-57.
The IRS has released an updated version of Publication 1546, The Taxpayer Advocate Service of the IRS: How to Get Help With Unresolved Tax Problems.
Tip of the Day
Waiver of 60-day IRA rollover deadline . . . The law provides that the IRS may waive the 60-day rollover requirement where the failure to do so would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement. Only distributions that occurred after December 31, 2001, are eligible for the waiver. Rev. Proc. 2003-16 provides that in determining whether to grant a waiver, the IRS will consider all relevant facts and circumstances, including: (1) errors committed by a financial institution; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error, (3) the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and (4) the time elapsed since the distribution occurred. While you may be able to secure a waiver, it's certainly not a sure thing. And doing so is not likely to be cheap. Talk all necessary steps to make sure you don't exceed the 60-day period, but if you do all may not be lost.
May 10, 2008
News
The full House has passed the housing package bill by a 322 to 94 vote. The provisions include a first-time homebuyer tax credit of up to $7,500 intended to help in the down payment; a addition to the standard deduction for the deduction of real property taxes of up to $350 for individuals or $700 for those filing married joint; and a temporary increase in low-income housing tax credit.
The IRS has issued final regulations (T.D. 9397) relating to the assumption of liabilities under Section 358(h). Section 358(h) provides that, after application of Section 358(d), the basis in stock received in a nonrecognition transaction shall be reduced to the fair market value of the stock by the amount of any liability assumed in the exchange. The IRS has determined that removing an exception to Section 358(h) is necessary to prevent abuse.
The IRS has issued final regulations (T.D. 9396) that amend T.D. 9361, titled Transfers of Assets or Stock Following a Reorganization. These final regulations make certain clarifying amendments to the rules regarding the effect of certain transfers of assets or stock on the continuing qualification of transactions as reorganizations under Section 368(a).
IRS Notice 2008-49 (IRB 2008-20) modifies Notice 2007-45 and provides additional interim guidance with respect to the requirement under Section 6104 that Section 501(c)(3) organizations make available for public inspection Forms 990-T, Exempt Organization Business Income Tax Return. This notice reflects the amendments to Sections 6104(b) and 6104(d) in the Tax Technical Corrections Act of 2007. The amendments are effective for Forms 990-T filed with the IRS after August 17, 2006.
Tip of the Day
Contracts survive ownership change . . . When you sign a contract with a corporation, LLC, partnership, etc. you're making an agreement with an entity. And the contract will survive an ownership change. For example, you agree to rent space to Madison Inc. You've known Fred Flood for years. But Fred decides to sell Madison to your ex-wife's brother, someone you never got along with. You're stuck Madison Inc., and your ex-wife's brother, until the lease expires. The rule can work to your advantage. If you've got a lucrative contract you want to keep, you should be able to do so. If the contract is significant and/or you there are personal or business relationships to consider, discuss the issue with your attorney.
May 9, 2008
News
The IRS has released IR-2008-70, a list of the most-frequently-asked questions--and--answers that people are asking about the Economic Stimulus Payments. To view the full document go to www.irs.gov/pub/irs-news/ir-08-070.pdf.
Revenue Ruling 2008-25 (IRB 2008-21) addresses the tax treatment of an integrated transaction whereby the stock of a target corporation is acquired in a taxable reverse subsidiary merger followed by the liquidation of the target.
Section 108(a)(1)(D) and (c) generally allows a taxpayer to avoid reporting income generated from discharge of qualified real property business indebtedness and, instead, to reduce their basis in property. In the case of a partnership, that involves the reduction of basis of the partner's proportionate interest in depreciable property held by the partnership. In Jack M. Mezrah et ux. (T.C. Memo. 2008-123) the taxpayers did not make that election. After their return was filed the taxpayers requested a private letter ruling seeking relief under Sec. 301.9100-3. The IRS issued a ruling in which the Service denied the taxpayers' Section 9100 relief request on the grounds that the IRS was prejudiced because the taxpayers took depreciation deductions beyond their exhaustible partnership basis for taxable years closed by expiration of the limitations periods for assessments. The taxpayers contended contend that they should be granted Section 9100 relief in order to file a late Section 108(c)(3)(C) election for their taxable year 1994. They note that they are willing to refund any benefit they received during the closed years from depreciation deductions taken beyond their partnership basis as it should have been reduced under Section 1017. The Court noted it did not have jurisdiction over the closed tax years and allowing the taxpayers to make a late election now would lead to a lower tax liability for all tax years affected by the election and result in prejudice to the interests of the Government.
Tip of the Day
Custodian account for your child . . . If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's social security number to the payer. For example, you must give your child's SSN to the payer of interest on an account owned by your child, even though the interest is paid to you as custodian.
May 8, 2008
News
In Richard Kelby et ux. (130 T.C. No. 6) the taxpayers petitioned the Court for review of a notice of determination issued under Sec. 6330. Thereafter, the case was remanded to the IRS's Appeals Office three times; each time a supplemental notice of determination was issued. On the third remand, the IRS conceded that the taxpayers' 1989 tax liability was fully satisfied as of April 1990, and the parties agreed that the taxpayers' remaining liabilities would be satisfied by an installment agreement. Although the parties have substantially settled this case, the taxpayers contend that each notice of determination must be separately reviewed in light of their personal and financial status at the time the notice was issued. The Court held that under Sec. 6330 the Court reviews the position taken by the IRS's Appeals Office in the last supplemental notice of determination, not each notice separately.
In Morton L. Ginsberg (130 T.C. No. 7) the taxpayer filed a complaint with District Court seeking review of the IRS's determination to proceed with collection of a trust fund recovery penalty. The District Court remanded the case to the IRS's Appeals Office, which issued a supplemental determination notice. The Pension Protection Act of 2006, amending Sec. 6330(d), to expand this Court's jurisdiction over Sec. 6330 determinations, became effective with respect to determinations made after a date that fell between the dates of the original determination notice and the supplemental determination notice. The taxpayer filed a petition with this Court in response to the supplemental determination notice. The Court held it lacked jurisdiction to review the IRS's determinations in the supplemental determination notice. The supplemental notice relates back to the original notice and is not a new determination for purposes of the effective date of amended Sec. 6330(d).
Make sure you follow the rules before filing suit. In Robert C. Carnick (2008-1 USTC 50,246; U.S. District Court, East. Dist. Mich. So. Div.) the Court found it did not have jurisdiction because the taxpayer filed his refund suit the required six months after filing his administrative refund claim with the IRS.
Tip of the Day
Analyzing your interest income and expenses . . . It's one area where you can maximize your tax savings. There's no simple rule of thumb here. You've got to look at your interest income and expense and the tax effects on both. For example, you've got a rental property with a large mortgage. The property was generating deductions until you got a big raise. Your adjusted gross income is well over $100,000, limiting your losses. Meanwhile, your investments are generating $10,000 a year in interest income. You're paying tax on the income and not getting a deduction for all the interest expense. Consider liquidating some of the investments and taking the cash to pay down the mortgage. The approach makes even more sense if you're only getting 4% on your investment and the mortgage is at 6%. If you're paying 9% on a car loan (where the interest isn't deductible), the savings will be even more significant. But don't forget to consider other factors. For example, because your financial situation has changed, you won't be able to get a home equity loan and your business may need additional funding. Don't give up your cash reserve to pay down a low-rate home equity loan or mortgage. Discuss the situation with your financial adviser or accountant before making any big moves. He or she may have other suggestions.
May 7, 2008
News
Poor or missing documentation is one of the most frequently encountered reasons for the IRS denying deductions. In Ronald A. Tash (T.C. Memo. 2008-120) the taxpayer labeled 27 checks made out to a worker as "Payroll Expense" but, according to the IRS, originally characterized them as payments for employee benefit plan expenses in order to avoid paying payroll taxes. The IRS disallowed a deduction for the payments. The Court, noting the testimony of the taxpayer and the worker, found that the testimony and records were inadequate to meet the taxpayer's burden to prove the checks were wages, but held the record indicated the taxpayer used the checks to pay for services and items related to his business. Thus, it allowed the deduction. With regard to a second expense the taxpayer was not so lucky. He presented no documentary evidence establishing an ordinary and necessary business purpose for the miscellaneous checks. Although he testified as to the purpose behind the checks, the testimony was vague and left unclear whether the payments were expenses of the taxpayer's business. For example, with respect to a cell phone bill the taxpayer could not show whether the phone was used for business or personal purposes and did not demonstrate that his checks paid expenses that were "normal, usual, or customary" for his business. The Court held since the record provided no satisfactory basis for estimating the taxpayer's legal and professional service expenses he failed to adequately substantiate the business purpose behind the 21 miscellaneous checks. The Court noted it could not guess as to the character of those expenditures when confronted with an inadequate record. Consequently, the Court did not apply the Cohan rule to estimate the amount of the taxpayer's legal and professional service expenses.
Tip of the Day
Don't rock the boat . . . Unless it's sinking. While some businesses are doing well, many will be affected by the soft economy. If your business is doing well, or at least doing better than your competitors, you probably have a good formula. Now's not the time to get aggressive, unless it's to take advantage of your competitors' weakness. You may have a retail shop that's doing fine; opening another is probably risky. First, the new location may not do well and second, you may need all your available cash and lines of credit should the original store run into problems. On the other hand, if sales are dropping and your current marketing strategy isn't working, you want to try a different approach. If you haven't been through a downturn before, you might want to get advice from someone who has. His or her experience can be invaluable.
May 6, 2008
News
Section 6320 provides that the IRS must furnish the taxpayer with written notice (i.e., the hearing notice) of the filing of a notice of lien under Section 6323. Section 6320 further provides that the taxpayer may request administrative review of the matter (in the form of a hearing) within a 30-day period. Pursuant to Section 6330(c)(2)(A), a taxpayer may raise at the hearing any relevant issue with regard to the IRS's collection activities, including spousal defenses, challenges to the appropriateness of the IRS's intended collection action, and alternative means of collection. In Doris Denise O'Daniel (T.C. Memo. 2008-119) the Court noted the taxpayer raised the issue of interest abatement only after the parties reached an agreement on the taxpayer's liability for income taxes and additions to tax for the year. The taxpayer did not raise this issue in the hearing request, at the hearing, or in the petition. Accordingly, we conclude that the taxpayer's claim for interest abatement is not properly before the Court.
The taxpayers were U.S. citizens who resided in Canada during the year at issue. They filed a joint Form 1040 for the year. Since most of the taxpayers' reported income was earned and taxable in Canada, they claimed foreign tax credits against their reported U.S. liability, resulting in a net liability of $1,297. The taxpayers did not compute their AMT liability; instead they referenced U.S.-Canada Income Tax Treaty Articles XXIV and XXIX. The IRS determined they were liable for an AMT of $6,078, resulting solely from the application of the AMT foreign tax credit limitation in Section 59(a)(2). The Court held that Section 59(a)(2) takes precedence under the last-in-time rule over the tax treaty.
Tip of the Day
Looking for a hospital? nursing home? . . . If you're doing research on nursing homes, hospitals, or even looking for a doctor, consider starting at www.medicare.gov. You'll probably end up going further, but this is a great starting place, and it's free. Many states have information on doctors, nursing homes, etc., some more detailed.
May 5, 2008
News
Before the IRS will accept an offer-in-compromise, you'll have to present a complete report of your assets. In William G. Schwartz et ux. (T.C. Memo. 2008-117) the taxpayer submitted an offer for some $129,000 for a tax debt of approximately $287,000. The IRS did not accept an appraisal of the taxpayer's home, noting the report was old, that other properties in the area that had sold for more were not reflected in the appraisal. It also noted that prices in recent years had increased by more than 70%. In addition, the Service questioned an "open end mortgage" held by the taxpayer's father which was recorded shortly before the filing of the IRS's notice of tax lien.
When it comes to paying alimony, you've got to be careful to dot your i's and cross your t's. In Walter Oliver Melvin (T.C. Memo. 2008-115) the Court noted that the term alimony is defined as, among other things, a "payment in cash". And the regulations under Section 215 provide that alimony deductions are allowed for payments "actually paid by the taxpayer during his taxable year". Here the taxpayer claimed he made "advance" alimony payments in prior years some of which he deducted in the year at issue. The Court denied the deduction.
You can't put the responsibility of filing a tax return on another party. In Suzanne T. Bray (T.C. Memo. 2008-113) the taxpayer failed to file a return for 2000. The taxpayer asked her husband's former employer to prepare the return, as it had for previous returns and for other employees who worked overseas. The taxpayer also failed to file her 2002 return, claiming she thought that return could not be filed until the 2000 return was submitted. The Court offered no relief, finding that her mistaken beliefs concerning filing requirements did not constitute reasonable cause for failure to file. The Court noted the taxpayer offered no evidence that she sought out or received professional advice indicating that she was precluded from filing her 2002 return on time. The Court also found she did not have reasonable cause for failing to pay her 2002 tax liability when due.
Tip of the Day
Different market, different mailing . . . If your direct mail target is a small audience of customers who spend a substantial amount per purchase you can afford (and may have to) to use expensive inserts, graphics, etc. to get attention to your letter. On the other hand, if you're doing a direct mail campaign to attract new customers, your mailing yield is expected to be low, or the average sale is small, etc. you should be looking to keep your cost per piece low. Skip the expensive insert and get more imaginative with color and copy. You want their first order so offer something free with any purchase over a set amount.
May 2, 2008
News
The IRS has announced (IR-2008-68) that economic stimulus payments directly deposited to an individual's IRA or similar account may be withdrawn without penalty. For complete details see Relief for Stimulus Payments Withdrawn from IRAs and Tax-Favored Accounts.
Revenue Procedure 2008-20 (IRB 2008-20) provides guidance relating to the obligation of material advisors to prepare and maintain lists with respect to reportable transactions under Sec. 6112 and provides that material advisors may use the Form 13976, “Itemized Statement Component of Advisee List” (or successor form) to maintain the itemized statement component of the list. The use of the form is optional. The form is available on the IRS Web site.
Generally, you can only deduct 50% of any meal expense. In Mike Kurtz (T.C. Memo. 2008-111) the taxpayer was an engineering on board commercial fishing vessels. The employers provided meals on board, but deducted $25 per day from the taxpayer's compensation for food expenses. The IRS and the taxpayer agreed that he could calculate his deductions for meals and incidental expenses using the Federal M&IE (per diem) rates applicable to Dutch Harbor, Alaska. However, the IRS argued that the taxpayer's allowable deduction for meals was limited to 50% of the per diem rate. The taxpayer argued that he qualifies for the exception to the 50% rule under Sec. 274(n)(2)(E), also citing 18 U.S.C. Sec. 2191 prohibiting cruel treatment of seamen. The Court did not agree. It held the meal deduction was subject to the 50% rule.
Tip of the Day
Concessions on the sale of property . . . While it's most common in real estate sales, purchase and sale contracts often require that certain steps be taken before closing. If they're not accomplished, you may owe a penalty. For example, you're selling your home and the buyer notices that there are exposed studs in the furnace room and wants sheetrock installed. The buyer's lawyer may include a clause in the contract specifying that if the drywall isn't installed, the selling price will be reduced by $750. Often the "penalty" far exceeds the cost of complying. If you're the seller, make sure you budget enough time to have the job done. Even if there's no penalty associated with noncompliance, the buyer on the final walk-through may threaten to hold up signing, especially in the current market. Don't wait till the last minute.
May 1, 2008
News
The IRS has issued final regulations (T.D. 9395) relating to third-party and John Doe summonses. These final regulations reflect amendments to sections 7603 and 7609 of the Internal Revenue Code of 1986 made by the Internal Revenue Service Restructuring and Reform Act of 1998, the Omnibus Budget Reconciliation Act of 1990, the Technical and Miscellaneous Revenue Act of 1988, and the Tax Reform Act of 1986. These final regulations provide guidance relating to the manner by which summonses may be served on third-party recordkeepers, the expanded class of third-party summonses subject to notice requirements and other procedures, and the suspension of periods of limitations if a court proceeding is brought involving a challenge to a third-party summons, or if a third party's response to a summons is not finally resolved within six months after service. These final regulations affect third parties who are served with a summons, taxpayers identified in a third-party summons, and other persons entitled to notice of a third-party summons.
Partnerships can have some significant tax advantages, but there can be disadvantages and traps. In Charles W. Bassing, III (2008-1 USTC 50,236; U.S. Court of Federal Claims) the issue before the Court was whether a partner's release from his obligation to restore his negative capital account balance was a partnership item or an affected item. The Court held that the release was a partnership item and, therefore, the income gained from the release was attributable to a partnership item. Accordingly, the taxpayer's complaint was barred by statute.
Tip of the Day
Qualified S corporation shareholders . . . Generally, only individuals, estates and certain trusts can be shareholders in an S corporation. Partnerships and corporations cannot. In a recent letter ruling (LTR 200816003) the sole shareholder of an S corporation requested a ruling whether the contribution of his S corporation shares to an LLC in which he was the sole member would terminate the S election. The IRS noted that the LLC would be a disregarded entity (since the taxpayer was the sole shareholder). The IRS ruled that the taxpayer's contribution of the S corporation stock and other property to the LLC in exchange for a 100% membership interest in the LLC would not terminate the S corporation election. Caution. A letter ruling is directed only to the taxpayer requesting it. It may not be used or cited as precedent.
April 30, 2008
News
The IRS has issued final regulations (T.D. 9394) regarding when a partnership may consider certain deductions and losses of a foreign partner to reduce or eliminate the partnership's obligation to pay withholding tax under Section 1446 on effectively connected taxable income allocable under Section 704 to such partner. The regulations will affect partnerships engaged in a trade or business in the United States that have one or more foreign partners. The final regulations also include conforming amendments Sections 1.1446-3 and 1.1446-5 and to regulations under Sections 1464, 6071, 6091, 6151, 6302, 6402, 6414, and 6722.
The IRS has issued proposed regulations (REG-208199-91) regarding the use of designated summonses and related summonses and the effect on the period of limitations on assessment when a case is brought with respect to a designated or related summons. This document also withdraws the previous proposed regulations. These proposed regulations reflect changes to Section 6503 made by the Omnibus Budget Reconciliation Act of 1990 and the Small Business Job Protection Act of 1996. These regulations affect corporate taxpayers that are examined under the coordinated issue case (CIC) program and are served with designated or related summonses. These regulations also affect third parties that are served with designated or related summonses for information pertaining to the corporate examination.
Tip of the Day
State and local taxes . . . States are becoming strapped under the current economic environment. In some cases taxes may be raised or loopholes closed. Most states post changes in regulations, rulings, etc. on their Web site (go to www.smbiz.com/sbrl041.html for links to state tax sites). In addition, look for the states to become more aggressive in tax enforcement. Generally that means more and tougher audits.
April 29, 2008
News
A farm bill in Congress would lower the per-gallon tax credit on corn ethanol by 6 cents but raise the credit on cellulosic ethanol from 51 cents to $1 per gallon.
The IRS has released a revised Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.
In Nancy Walker (2008-1 USTC 50,226; U.S. District Court, N.J.) the IRS was allowed to revoke a release of lien it released in error. The Court noted that the Code provides that if a certificate of release was issued erroneously, and the collection statute has not expired, the IRS may revoke the release and reinstate the lien.
In Dieter H. Klohn (2008-1 USTC 50228; U.S. District Court, Mid. Dist. Fla., Jacksonville Div.) the Court found that two trust fund recovery penalty assessments were void since they were assessed in violation of the automatic stay arising in a bankruptcy proceeding that was in place at the time the assessments were made.
Tip of the Day
Examine costs regularly . . . Prices change, often without noticing. Spotting changes in direct costs is usually easy. Most manufacturers will spot a fraction of a percent increase in raw material prices. Service companies will notice an increase in supplies used in delivering the service. But what about indirect costs? An increase in the cost of office supplies or services may go unnoticed. Or, if noticed, may not be factored into your pricing or business analysis. For example, you operate a installation and repair business. Because of the cost of certain repair parts, you don't carry them in the truck. In the past it's been more cost efficient to send the helper to get the part from a supply house. With the high price of gas, you may want to reconsider that action. Between the cost of operating the truck (the IRS estimates auto cost at 50.5 cents per mile, most experts concede that's low and a truck has to cost more) and the time lost, it may now make more sense to stock the truck with more parts. Don't ignore indirect costs. For many businesses they can amount to a substantial portion of total costs.
April 28, 2008
News
Wesley Snipes was sentenced to 3 years in prison, for failing to file tax returns. Prosecutors had argued that Snipes failed to pay some $15 million in income taxes over a 10-year period. Snipes's attorneys have asked for probation. This has just been the criminal case. The IRS is also looking for full payment of the taxes with interest in a civil proceeding. Despite the jail time, Snipes fared better than his codefendants who received 10 years and 4-1/2 years of prison time.
The IRS has issued proposed regulations (REG-112196-07) that provide guidance relating to the availability of the election to use the alternate valuation method for estate taxes under Section 2032. The proposed regulations will amend Sec. 20.2032-1 by restructuring paragraph (f) of this section to clarify that the election to use the alternate valuation method under Section 2032 is available to estates that experience a reduction in the value of the gross estate following the date of the decedent's death due to market conditions, but not due to other post-death events. The term market conditions is defined in the proposed regulations and examples are provided, which are not intended to be exclusive.
The IRS has released a coordinated issue memorandum that indicates a transaction described in Notice 2008-34, Distressed Asset Trust Transaction, should be treated as a coordinated issue effective February 27, 2008.
Tip of the Day
Estate tax deduction . . . If your annuity was a joint and survivor annuity that was included in the decedent's estate, an estate tax may have been paid on it. You can deduct, as a miscellaneous itemized deduction, the part of the total estate tax that was based on the annuity. This deduction is not subject to the 2% floor. The deceased annuitant must have died after the annuity starting date. The amount cannot be deducted in one year, but must be deducted in equal amounts over your remaining life expectancy. If the decedent died before the annuity starting date of a deferred annuity contract and you receive a death benefit under that contract, the amount you receive in excess of the decedent's cost is included in your gross income as income in respect of a decedent.
April 25, 2008
News
It appears that the housing stimulus package and the Housing Assistance Tax Act should reach the floor of the House in about a week and a half.
The IRS is reminding (IR-2008-65) retirees and disabled vets who do not normally file tax returns that they can still file a 2007 return to receive an economic stimulus payment. Individuals who do not file a return cannot get the payment. You must have at least $3,000 in qualifying income to receive a payment.
Ideally, if you sell your business you'd like all the proceeds to be allocated to goodwill, a customer list or some other intangible. If that's the case, all the gain will be taxed at favorable long-term capital gain rates. On the other hand, payments by the buyer for a covenant not to compete generates ordinary income to the seller. In Robert L. Solomon et ux. et al. (T.C. Memo. 2008-102) the taxpayer, and other members of his family sold their business to a competitor. The Court looked at the facts, noting that they buyer of the business became the sole supplier of the product once produced by both parties and, thus, the customer list was of little value to the buyer. In addition, the buyer never required that any part of the purchase price be allocated to the customer list. On the other hand, the covenant not to compete and keeping the family members from reentering the industry did have substantial value. The Court allocated the proceeds to the covenant not to compete and not to the customer list.
In Regan D. Reedy et ux. (T.C. Memo. 2008-100) the taxpayers liquidated their corporation and transferred approximately $255,000 to an offshore trust/tax avoidance scheme based in Costa Rica that involved the use of offshore credit cards and bank accounts. The taxpayers did not file timely tax return for the year at issue, and, when the return was ultimately filed, it did not report the proceeds from the liquidation. At some point the taxpayers submitted statements, contentions and/or arguments the Court found to be frivolous and groundless. In addition, the taxpayers refused to comply with the Court's order requiring them to comply with the IRS's discovery requests and thus prevented the case from proceeding to the stage at which it is ready for trial. The Court dismissed the taxpayer's petition and imposed a $15,000 penalty under Sec. 6673(a)(1).
Tip of the Day
Made in the USA . . . Everyone seems to be sending just about any product overseas for manufacture. In some cases it's not much of a decision. The costs of manufacture are so much lower. But you might want to take a closer look if the manufacturing savings are relatively small. The savings may be close to offset by other costs that you can identify, such as shipping, or less tangible ones. If manufactured locally you won't have to worry about as much about time in transit. Nor will you have to worry about some company in a foreign country counterfeiting your product. Finally, you'll be able to say it's "Made in the USA"; that could give you some extra sales.
April 24, 2008
News
The IRS has released an updated 2007-2008 Priority Guidance Plan listing regulations and other guidance it is working on. The Service is planning to issue guidance with respect to substantiation requirements for cell phones and other similar telecommunications equipment.
The IRS has announced (REG-109367-06) it is withdrawing a notice of proposed rulemaking relating to the circumstances in which accounts or notes receivable are "acquired . . . for services rendered" within the meaning of Sec. 1221(a)(4).
In order to qualify for an offer-in-compromise (OIC) to settle your tax liability for less than the full amount, you must meet a number of requirements. In Michael Poindexter (T.C. Memo. 2008-99) the taxpayer was required to timely file all Federal income tax returns and timely pay all income taxes due for the 5 years following acceptance of the OIC or until the OIC was paid in full, whichever was longer. The taxpayer failed to pay his taxes for two years on time. The IRS sent the taxpayer a letter advising him of the outstanding balances and notifying him that failure to pay the balances within 30 days would result in a default on the OIC and reinstatement of the original tax liability. The Court agreed with the IRS that the Appeals officer did not abuse her discretion in sustaining the default of the OIC and proceeding with the levy.
Tip of the Day
GPS tracking in company cars . . . A town in New York put GPS tracking units in all town vehicles with the knowledge of their employees. Total usage went down just over 20% in a year. The cost of installing and monitoring the tracking units is not that high. They don't make sense for every business, but if you've got a number of vehicles used by employees, particularly if they're allowed to take them home at night, you should consider their use. With the increasing price of gas and diesel, you should recoup your costs quickly.
April 23, 2008
News
The Supreme Court has denied certiorari in Marrita Murphy. The taxpayer petitioned the Supreme Court to review a D.C. Circuit opinion where that Court originally overruled a District Court decision and held that a damage award for emotional distress was excludable from gross income. The D.C. Circuit later vacated its decision, reversing itself and finding the damage award was not excludable from income.
The IRS has launched a campaign (IR-2008-63) to help educate new self-employed small business owners about federal tax responsibilities. The campaign kick-off coincides with the Small Business Administration’s annual Small Business Week, April 21-25, which recognizes outstanding small business owners for their contributions to the nation's economy and their personal achievements. The campaign will provide new Schedule C, Profit or Loss from Business, filers with improved and updated educational materials through a variety of channels, including IRS.gov, small business workshops and other outreach events.
Tip of the Day
Cut your losses . . . Entrepreneurs can be stubborn. It's part of what makes them succeed. There's nothing wrong with fighting the odds, continuing to try and make a go of a business that's had its share of problems. But there are times when it's smarter to give up the fight. That's often the case if you're trying to fight city hall, e.g., zoning problems, or some other organization. Showing your business plan to 20 investors in the hope of getting financing is OK. (Although it should give you pause for reflection.) But building that new restaurant in an area that floods every other year just because of the great view doesn't make sense. There was a famous nuclear reactor built at a cost of some $5 billion. The utility was told time and time again they would not get a license. They doggedly continued on, ultimately to abandon the project. Fortunately, the cost was borne by the customers, not the utility. And it's great to be early to the game, but sometimes arriving fashionably late makes more sense. Many of the early internet startups failed, only to see later ones with the same or a slightly different business plan succeed. Recognize that some problems are insurmountable, or can only be solved at excessive cost. If you're in such a position, get advice from outsiders. Start with your accountant but also talk to business experts at local colleges, state development organizations, etc.
April 22, 2008
News
You have 60 days to roll over distributions from an IRA before they become taxable and subject to the 10-percent penalty tax if you don't meet one of the exceptions. In Blake Sime Atkin et ux. (T.C. Memo. 2008-93) the taxpayer argued that within 60 days of withdrawing the funds from his SEP-IRA he instructed his bookkeeper to write a check for the amount of the withdrawal and mail it to his broker for depositing in a new IRA. The broker never received the funds. The taxpayer argued he was unaware the funds were not rolled over until he received a deficiency notice from the IRS. The taxpayer inquired of the bookkeeper who indicated the check was never cashed. The taxpayer cited Wood (93 T.C. 114). The Court noted in that case the trustee deposited the funds in the wrong account and the error was not corrected for 4 months. The Court went on to say the facts in the current case are distinguishable from those in Wood. Here the taxpayer waited over 2 years before inquiring into the status of the distribution. The taxpayer claimed that the check was lost in the mail and thus the failed rollover was not his fault. Whether the check was lost in the mail was not dispositive. He should have been alert to the fact that he never received a statement regarding the IRA account he thought he had opened, never discussed investment strategies with his broker, and never noticed that the $25,000 had not been withdrawn from his company's operating account. These facts and the that he took no steps to follow up in over 2 years led the Court to find that the taxpayer was liable for the penalty tax and for the accuracy-related penalty.
Tip of the Day
Unsecured creditors get little . . . Worried about a customer's financial condition? Statistics show that unsecured creditors generally receive little or nothing in a bankruptcy. Most businesses, and particularly small businesses, don't seek bankruptcy protection until it's too late. Once the secured creditors such as banks, equipment lenders, etc. and the IRS, state, etc. are paid off, there's nothing left. There are usually warning signs of a business in trouble. Look for them and act accordingly.
April 21, 2008
News
The IRS has issued proposed regulations (REG-147775-06) providing guidance under Section 2642(g)(1). The proposed regulations describe the circumstances and procedures under which an extension of time will be granted under Section 2642(g)(1). The proposed guidance affects individuals (or their estates) who failed to make a timely allocation of generation-skipping transfer (GST) exemption to a transfer, and individuals (or their estates) who failed to make a timely election under Section 2632(b)(3) or (c)(5).
Good recordkeeping is important for all income and expenses, but particularly so for travel and entertainment and for "listed property". Listed property includes autos, and certain items that can be used for both business and personal purposes. That includes cell phones. In Chukwuma I. Odelugo (T.C. Memo. 2008-92) the Court sided with the IRS in finding that the taxpayer's documentation of cell phone usage was not sufficient to meet the requirements and disallowed the deduction.
You may be able to recover your litigation costs if you prevail against the IRS, but you've got to meet certain requirements. In Charles B. Covert (T.C. Memo. 2008-90) the taxpayer decided to forego a hearing with the Appeals Office and await the deficiency notice to petition the Tax Court. The taxpayer believed this course would avoid a protracted battle with the IRS and reasoned that a hearing would only delay a resolution of the case. Accordingly, the taxpayer did not meet with an Appeals officer for an Appeals Office conference. The Court held that, by foregoing the meeting with the Appeals Office, the taxpayer failed to exhaust his administrative remedies and, therefore, was not entitled to an award of reasonable litigation costs.
Tip of the Day
Protect your name . . . It may be your most valuable asset. There are two considerations here. First, you want to make sure your name is trade marked or otherwise protected. Once you've done that you want to make sure no one uses your name without your permission. Talk to your attorney. Second, it may be tempting to let others use the name for a royalty. For example, you put in custom swimming pools under the name Madison Custom Pools. Everyone knows your work is top quality. A pool maintenance company wants to use your name in their advertising and will pay you $100 per ad. Sounds like easy money. But if that company makes news in a less than flattering way, your name can suffer. The cost could easily outweigh the royalties you collected. There are ways to protect yourself. Again, talk to your attorney.
April 18, 2008
News
The IRS has issued final regulations (T.D. 9393) providing guidance on employer comparable contributions to Health Savings Accounts (HSAs) under Section 4980G in instances where an employee has not established an HSA by December 31st and in instances where an employer accelerates contributions for the calendar year for employees who have incurred qualified medical expenses. These final regulations affect employers that contribute to employees' HSAs and their employees.
The IRS has issued proposed regulations (REG-141998-06) relating to the validity and priority of the Federal tax lien against certain persons under Section 6323. The proposed regulations update the corresponding Treasury Regulations in various respects. The proposed regulations reflect the adjustment within Section 6323(b) of certain dollar amounts as well as the amendment of Section 6323(b)(10) by the IRS Restructuring and Reform Act of 1998 (RRA 1998). In addition, the proposed regulations amend the existing regulations under Section 6323(c), (g), and (h) to reflect that a notice of Federal tax lien (NFTL) is not treated as meeting the filing requirements until it is both filed and indexed in the office designated by the state (in the case of real property located in a state where a deed is not valid against a purchaser until the filing of such deed has been entered and recorded in the public index); the lien will be extinguished if an NFTL contains a certificate of release and the NFTL is not timely refiled; and current law provides the IRS with a 10-year period to collect an assessed tax. The proposed regulations also make changes to the existing regulations under section 6323(f) to clarify the IRS's authority to file NFTLs electronically. Finally, the proposed regulations make incidental changes throughout the existing regulations under section 6323 to make the dates in the examples more contemporaneous with the present and to remove language deemed no longer necessary.
If you're seeking a waiver of penalties you bear a heavy burden of proving both that the failure did not result from willful neglect and that the failure was due to reasonable cause. In Raymond DeSabato, Jr. et ux. (2008-1 USTC 50,219; U.S. District Court, Dist. Mass.) the taxpayers filed an extension request along with a check for the anticipated balance due. On receipt of the bank statement for April they noticed the check had not cleared. They contacted the IRS and were advised to wait two weeks before stopping payment on the check. When the check still didn't clear they contacted the IRS again. The IRS advised the taxpayer that he could send a replacement check with the return. The taxpayer did not file the return by the extended due date of October 15; instead he filed it, along with the required payment, some 10 months later. The taxpayer argued that he relied on the IRS's advice, that that constituted reasonable cause and should that the penalties should be abated. The Court did not agree, noting that, as a general rule, reliance on erroneous advice from a government official does not estop the government from enforcing the law, even if contrary to the advice given. The principle has even more force when the advice is oral. While the courts are split, at best some courts have held that reliance on IRS advice must be reasonable. In this case, it was clear that reliance on IRS advice that the taxpayer could delay filing beyond the October 15 deadline was not reasonable.
In Gary E. Zinkon (2008-1 USTC 50,223; U.S. District Court, So. Dis. W. Va.) the IRS asserted the taxpayer failed to the employment (trust fund) taxes from his business. The taxpayer argued that his business records were lost and that he could not independently verify the amount of the delinquent payroll taxes. The Court found that the taxpayer's inability to independently verify his tax debt did not satisfy his burden of establishing that the amounts of the assessments were erroneous.
Tip of the Day
Rapid change can alienate customers . . . Bringing to market products with more features, lower price, etc. can generate increasing sales but you've got to be careful not to go too far. You want your customers to upgrade, but not to feel like they've been cheated because they bought too early. That's especially true for "bragging items" such as cars, electronics, etc. Pace your product upgrades or price reductions. If you're in a competitive market, you might want to hold off an introduction until after your competitor announces. The problem isn't confined to consumer products. It applies to business products. We know of one company that promoted a product for small printing companies for $2,999. A week after the promotion was over it cut the price to $1,499 and announced an replacement product. They alienated many customers who paid the $2,999. That probably wasn't the only reason for the company's demise only 2 years later, but it certainly didn't help.
April 17, 2008
News
Notice 2008-46 (IRB 2008-18) provides guidance regarding implementation of the tax return preparer penalty provisions under Section 6694, by adding certain returns and documents supplementing Exhibits 1, 2 and 3 of Notice 2008-13, 2008-3.
The law provides for a 3-year statute of limitations for filing refund claims. In an earlier decision, the Court of Federal Claims held that the taxpayer could file a refund claim outside the 3-year period for taxes paid on coal exports claiming the Tucker Act applied and a claim could be brought within 6 years. In Clintwood Elkhorn Mining Co. et al. the United States Supreme Court held that the plain language of Secs. 7422(a) and 6511 require a taxpayer seeking a refund for a tax assessed in violation of the Export Clause, just as for any other unlawfully assessed tax, to file a timely administrative refund claim before bringing suit against the Government. Because the companies did not file a refund claim with the IRS for the 1994-1996 taxes, they may, under Sec. 7422(a), bring "no suit" in "any court" to recover "any internal revenue tax" or "any sum" alleged to have been wrongfully collected "in any manner." Moreover, Sec. 6511's time limits for filing administrative refund claims--set forth in an "unusually emphatic form,"--apply to "any tax imposed by [Title 26]," Sec. 6511(a).
The Justice Department is seeking the maximum 3 years imprisonment and a $5 million fine in the conviction of Wesley Snipes for failure to file income tax returns. The Justice Department set forth a long list of serious misconduct including the significant tax loss, the taxpayer's obstruction through a tax fraud mill, failure to file business and state tax returns, the threatening of government employees, the concealment of millions of dollars in offshore accounts, and a fraudulent conveyance and sham entities.
Tip of the Day
Extending credit? . . . You should be especially vigilant now. One credit card company announced a significant increase in delinquencies, despite an affluent customer base. The problems with the housing market are well documented. Small business owners that might have used home equity loans to get them over a rough spot may not have that option. If you're deciding on whether or how much credit to extend you might want to be more careful. Consider cutting back on the amount of credit and don't let customers go beyond the due date.
April 16, 2008
News
If an employer reimburses an employee for meals and entertainment expenses he or she incurred in working for the employer, generally only 50 percent of the expense is deductible. In Rev. Rul. 2008-23 (IRB 2008-18) the IRS provided guidance on who is subject to the 50 percent disallowance in three situations where a client leases employees from a leasing company and the leasing company reimburses the employees for meal and incidental expenses they incurred in the course of performing services.
The Taxpayer Assistance Act of 2008 is now on the floor of the House. The bill would repeal the IRS private debt collection program, require distributions from health savings accounts to be substantiated, remove cellphones as listed property, and exempt disabled and elderly from the responsibility for employment taxes on certain in-home health care providers.
The House has passed the Contracting and Tax Accountability Act of 2008. The bill would keep contractors who are delinquent on their taxes from winning government contracts and grants.
Tip of the Day
Fully leased, all the time . . . That's what many novice landlords believe will happen to their property. On the other hand, when you go to your banker for a loan he's going to factor in a significant vacancy rate, perhaps as much as 25%. The reality? The average vacancy numbers vary for different types of space and property, but budgeting 15% isn't excessively conservative. You may have a building fully leased for a year or two, but at some point, you'll have vacant space. Older buildings, particularly those that haven't been updated, buildings that look tired (paint not fresh, carpet worn, less than spotless, no longer in a good location, etc.), are likely to have a higher vacancy. Good management can help, but can't overcome a really poor building. Sometimes it's just luck. We've seen some quality single-tenant properties in good locations go dark for one, two or even more years. Getting an above-average return on a property isn't as easy as it may look. That's especially true in a tight market.
April 15, 2008
News
The IRS has issued proposed regulations (REG-108508-08) providing guidance on the determination of minimum required contributions for purposes of the funding rules that apply to single employer defined benefit plans. These regulations would affect sponsors, administrators, participants, and beneficiaries of single employer defined benefit plans.
The IRS announced (IR-2008-58) that it will issue guidance for businesses on how the special 50 percent depreciation allowance that was included in the Economic Stimulus Act of 2008 can be used to make capital investments this year. Until the guidance is issued, businesses may rely on the regulations previously issued regarding bonus depreciation. This special "bonus depreciation" allowance is available to all businesses and applies to most types of tangible personal property and computer software acquired and placed in service in 2008. It allows taxpayers to deduct 50 percent of the cost of qualifying property in addition to the regular depreciation allowance that is normally available. Because the special 50 percent depreciation allowance contained in the Economic Stimulus Act of 2008 is generally patterned after prior bonus depreciation statutes, the Treasury Department and the IRS intend to issue guidance allowing taxpayers generally to rely on Treas. Reg. Sec. 1.168(k)-1 for purposes of the bonus depreciation provision of the Economic Stimulus Act of 2008.
Tip of the Day
Last minute advice . . . The IRS has issued some last-minute advice to taxpayers. We've reproduced it at Last-Minute Advice From the IRS. We've got some of our own advice. Don't rush to file. There's too much of a chance to make a mistake. And, while you may think that you'll check the return later, the odds are that you won't. Filing an extension doesn't increase your chance of an audit; making a mistake can.
April 14, 2008
News
The Senate passed, by an 84 to 12 vote, a housing stimulus bill that contains a $7,000 nonrefundable tax credit to purchasers of a qualified home in or near foreclosure, allows nonitemizers to deduct $500 ($1,000 for those married filing joint) of real estate taxes and extends the net operating loss carryback from two to four years, but only for losses incurred in 2008 and 2009. The Clean Energy Tax Stimulus Act of 2008 which passed the Senate in a 88-8 vote contains a number of tax credits for solar and renewable energy and an extension of the energy-efficient homes credit. The House has pending legislation with many similar provisions.
The IRS has released an update to Publication 971, Innocent Spouse Relief.
Tip of the Day
Carryback of losses . . . You can generally carry back net operating losses 2 years and forward 20 years, but eligible losses, farming losses, qualified GO Zone losses, and specified liability losses qualify for longer carryback periods. Eligible losses can be carried back 3 years and include any part of an NOL that is from a casualty or theft or is attributable to Presidentially declared disaster for a qualified small business (generally a partnership or sole proprietorship with average annual gross receipts of $5 million or less). Farming losses can be carried back for a period of 5 years. Qualified GO Zone losses can be carried back 5 years. To add some additional complexity to the rules, you can elect to figure the carryback period for a farming loss without regard to the special 5-year carryback rule.
April 11, 2008
News
The House Ways and Means Committee has approved it's version of the housing stimulus tax bill; the Senate is still working on its version.
In Industrial Electrical and Instrumentation Inc. (T.C. Memo. 2008-84) the Tax Court found the taxpayer fraudulently underpaid its taxes for the years at issue. The Court noted that during one of the tax years at issue customer checks totaling $1,995,915 were made payable to the taxpayer. Of that amount $551,815 was deposited in the corporate account; checks totaling $1,143,655 were cashed by the shareholders at check cashing stores and not reported on the taxpayer's tax return. Another $300,445 of checks were endorsed to another corporate entity and deposited in an escrow account.
Tip of the Day
AMT computation may require additional care . . . There's a good chance you may be subject to the alternative minimum tax (AMT) in 2007, even without making all the required adjustments on Form 6251. Taking a large deduction for state and local income taxes and real estate taxes alone can trigger the AMT. But you've got to be more careful if you've got deductible home mortgage interest. Only the interest on a mortgage used to purchase or improve your principal residence and a second home is deductible for AMT purposes. Interest on a home equity loan (if the proceeds aren't used to improve your home) aren't deductible for AMT purposes. Nor is the interest on a refinancing to the extend the new loan exceeds the principal amount of the old loan. If you have investments or do business as an S corporations, partnerships, LLCs, or a sole proprietorship you may have to make an additional adjustment. (If you receive a K-1, the depreciation adjustment is on the form.) Depreciation for regular tax purposes may be more than that allowed for AMT purposes. But because this is a timing difference, the unfavorable adjustment is only present in the early years of the investment. In the later years of ownership the adjustment becomes negative and can reduce your exposure to the AMT.
April 10, 2008
News
A House bill, the Taxpayer Assistance and Simplification Act of 2008 would change the penalty standards for return preparers, remove cellphones from listed property provisions, delay the withholding requirement on certain governmental payments for goods and services, and provide that elderly and disabled individuals receiving in-home care under certain government programs would not be subject to employment tax provisions. The bill would also increase information return penalties and the penalty for failure to file partnership and S corporation returns, and require substantiation of amounts paid or distributed out of HSAs (Health Savings Accounts).
The Housing Assistance Tax Act of 2008 would provide first-time home buyers with assistance in making a down payment on a home with a tax credit that would be repaid over 15 years, allow a deduction of $350 ($700 for joint filers) to nonitemizers for real estate taxes, temporarily increase the low-income housing credit, simplify tax-exempt housing bond rules, eliminate costs imposed on housing programs by the alternative minimum tax, and require basis reporting by brokers on sales of stock.
A return has to be postmarked by the due date to be timely. In Richard A. Prudhomme (T.C. Memo. 2008-83 the taxpayer testified that she mailed the return on October 15. This contradicts the postmark date on the envelope in which the return was mailed. The taxpayers argued on brief that the post office failed to postmark and send the item for 12 days. The taxpayers offered no evidence to support this claim other than making the unsupported observation that October 15, is a busy day for the U.S. Postal Service. The Court noted that even if it found the taxpayer's testimony and explanation credible, it would not render the return timely. The envelope in which the return was mailed bore a postmark date that was after the last day for filing the return. The return is thus untimely as a matter of law. The Court held the taxpayers did not show that their failure to file timely was due to reasonable cause. It held the taxpayers liable for the late filing penalty.
The IRS cannot levy on property until a taxpayer has received a notice of deficiency and been given the opportunity for a hearing. In Thomas Butti (T.C. Memo. 2008-82) the Tax Court noted the IRS bears the burden of proving by competent and persuasive evidence that the notice of deficiency was properly mailed. The act of mailing may be proven by documentary evidence of mailing or by evidence of respondent's mailing practices corroborated by direct testimony. Based on the evidence presented, the Court held the IRS failed to show a notice of deficiency and thus abused its discretion in proceeding with collection.
Tip of the Day
What return does an LLC file? . . . If you're the only member of an LLC, the income and expenses are reported on Form 1040, Schedule C (if a business), E (if a rental property) or F (for a farm operation). If the only member of the LLC is a corporation, the income and expenses are reported on the corporation's return, usually Form 1120 or Form 1120S. For example, Madison Inc., a C corporation, is the sole member of Chatham LLC. Chatham doesn't file any return. Rather, the income and expenses are reported on Madison's 1120. If there is more than one member to the LLC, it files a partnership return (Form 1065). (An LLC with more than one member can make an election to file as a corporation; Form 8832 must be submitted.) If the LLC has an operating loss, the amount of loss you can deduct may be limited because of your limited liability for LLC debts and the passive activity loss limitation rules may restrict the amount of loss you can deduct.
April 9, 2008
News
In Shoilen Christopher Ghose et al. (T.C. Memo. 2008-80) the taxpayers had invested in a jojoba limited partnership. They argued that the assessments were untimely because the statute of limitations had run. The IRS claimed they had not expired. The Court noted that, in general, Section 6501(a) provides that the amount of any tax imposed shall be assessed within 3 years after the return is filed. However, with respect to partnership and affected items, Section 6229(a) provides that the period for assessing tax shall not expire before the date which is 3 years after the later of the date on which the partnership return for such taxable year was filed, or the last day for filing such return for such year. Section 6229(d)(1) and (2) provides that the mailing of a final partnership administrative adjustment (FPAA) suspends the running of that 3-year limitations period for the period during which an action for judicial review of the FPAA may be brought (and, if an action is brought, until the decision of the court has become final) and for 1 year thereafter. A statute of limitations defense relating to the issuance of an FPAA must be raised during the partnership-level proceeding and cannot be raised at the partner-level proceeding. Thus, whether the FPAA was issued to the partnership within the limitations period in Section 6229(a) is not now at issue. We look only to whether the notices of deficiency issued to the taxpayers were timely. In April 2005, the Court entered a decision against the partnership upholding as correct the partnership item adjustments as determined and set forth in the FPAAs for its 1983 and 1985 taxable years. That decision was not appealed. Because a decision becomes final 90 days after it is entered if it is not appealed, the Court's decision became final in July 2005. Because the limitations period in this case expired in July 2006, 1 year and 90 days after the Court's April 2005 decision was entered, the notices of deficiency mailed to the taxpayers were timely.
Tip of the Day
Where's my refund? . . . If you file a paper return it'll take about six to eight weeks after the IRS receives your return. File electronically and you'll get the refund in half that time. Using direct deposit speeds things up significantly. If you filed a paper return you completed without tax preparation software, you're chances of making an error increase substantially and that could delay your refund. You can check on the status of your refund at https://sa1.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp, the official IRS site. To check on a state refund go to our page at http://www.smbiz.com/sbrl041.html for links to state refund sites.
April 8, 2008
News
The IRS has issued final regulations (T.D. 9392) that provide guidance for filing information returns by donees relating to qualified intellectual property contributions. These final regulations reflect changes to the law made in 2004. The regulations affect donees receiving net income from qualified intellectual property contributions made after June 3, 2004.
You may be able to avoid the accuracy-related penalty for an underpayment of tax if you can show that you relied, in good faith, on a professional for advice. But that exception only goes so far. In Ronald D. Neufeld et ux. (T.C. Memo. 2008-79) the Court noted that a taxpayer's duty to file an accurate tax return cannot be avoided simply by delegating responsibility to an agent. The taxpayers' unconditional reliance on their preparer does not, on the facts, constitute reasonable reliance and does not excuse their failure to closely examine their 2001 and 2002, and amended 2002, joint Federal tax income returns. Reliance on an accountant with complete information regarding taxpayer's business activities does not constitute reasonable cause where taxpayer's cursory review of return would have revealed errors. The Court sustained the IRS's determination that the taxpayers were liable for the accuracy-related penalty for substantial understatements of income tax for taxable years 2001 and 2002.
In Frank B. Kimball et ux. (T.C. Memo 2008-78) the Tax Court found the IRS provided the required notices of the administrative and judicial proceedings with respect to the taxpayers' income tax liability for the year, and found the taxpayers liable for the increased rate of interest on tax-motivated transactions under Sec. 6621(c). The Court also held the IRS did not abuse its discretion in not abating the interest under Sec. 6404(e).
The IRS has issued final regulations (T.D. 9391) that provide rules under Section 937(b) for determining whether income is derived from sources within a U.S. possession or territory specified in Section 937(a)(1) and whether income is effectively connected with the conduct of a trade or business within a territory. The final regulations also provide guidance under Sections 876, 881, 884, 931, 932, 933, 934, 935, 957, and 6688 of the Code to reflect amendments made by the Tax Reform Act of 1986 and the American Jobs Creation Act of 2004.
Tip of the Day
Qualified dividends . . . They're taxed at capital gain rates (for 2007 that's 5% or 15%), not at higher ordinary income rates. When is a dividend qualified? There are technical reasons, but most dividends from domestic regular corporations (not REITs) are qualified. Your 1099 will indicate the total dividends and any qualified dividends. But there's another requirement that's not on the 1099. You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. For preferred stock the 60-day rule is expanded to 90 days during the 181-day period beginning 90 days before the ex-dividend date.
April 7, 2008
News
If you're trying to settle your tax liability through an offer-in-compromise, you'll have to provide the IRS with financial information. In Dean Fangonilo (T.C. Memo. 2008-75) the IRS requested financial information on the taxpayer's friend with whom he shared living accommodations and who, he claimed, paid some of the household expenses. When the taxpayer failed to provide such information, the IRS rejected the offer-in-compromise. The Court sided with the IRS and noted the taxpayer could still submit another offer.
A family limited partnership can generate substantial estate tax savings, but you've got to follow a narrow line to avoid the IRS and the Courts collapsing the transaction. In Estate of Anna Mirowski et al. (T.C. Memo. 2008-74) the taxpayer was elderly and had physical problems, but planning had begun on the partnerships well before her death and her death was not anticipated by her doctors. Moreover, she retained sufficient assets to take care of her financial responsibilities. The Court noted that the partnership was at all times a valid functioning investment operation managing business matters related to the patents of her late husband, including related litigation. The Court rejected the IRS argument that the partnership had to rise to the level of a business to come under the Sec. 2036(a) exception. The Court found the transfers to the partnership were bona fide sales for adequate and full consideration.
True gifts do not constitute taxable income. In Faith J. Larsen (T.C. Memo. 2008-73) the taxpayer claimed that a $160,000 payment from her employer was a gift that stemmed from the romantic interests of the sole shareholder and did not report the amount as income on her federal return. The Court noted a gift must proceed from a detached and disinterested generosity, motivated by affection, respect, admiration, charity, or the like for income tax purposes. A payment between an employer and an employee may be a gift when the relationship between the employer and the employee is personal and unrelated to work. Here, the taxpayer received a 1099-MISC. The payment was related to the owner's efforts to entice the taxpayer to remain with the company. Moreover, the taxpayer reported the amount as income on her state return. The Court held the amount to be income and also found the taxpayer liable for the accuracy-related penalty.
Tip of the Day
Electronic extensions . . . The IRS is encouraging taxpayers who need extra time to file their extension requests electronically. E-filing a request for an extension is convenient, safe and secure, and taxpayers receive confirmation to keep with their records. The extension gives taxpayers until Oct. 15 to file the tax return. An extension does not give the taxpayer an extension of time to pay. Those who owe taxes can make a payment when they file the extension either by mailing a check or by several electronic payment methods, such as electronic funds withdrawals from bank accounts and credit card payments. Some taxpayers can wait until after April 15 to file a return, pay any taxes due and make IRA contributions for 2007. As a general rule, those eligible get the extra time without having to ask for it. Eligible taxpayers include:
Looking for a state extension? Many states also allow electronic filing.
April 4, 2008
News
Congress is working on a stimulus package aimed at the housing industry that would have several tax provisions including:
A bipartisan bill in the Senate would allow small-business owners who pay for at least 60 percent of an employee's health insurance a $1,000 annual credit. Additional credits would be given for family coverage, and coverage in excess of the 60-percent threshold.
You can't deduct start-up expenditures directly. (Start-up expenses can include investigatory costs such as due diligence costs of lawyers and accountants, business start-up expenses such as advertising, training employees, and pre-opening expenditures.) An exception allows you to deduct up to $5,000 of such costs. The remainder must be amortized over 180 months. But you must elect to amortize the start-up expenditures. You make the election by attaching a statement to your return for the taxable year in which the active trade or business begins. In Kelvin Jackson et ux. (T.C. Memo. 2008-70) the taxpayer fully deducted the expenses in a later year. He did not provide a description of each start-up expenditure and did not amortize the expenditures. The Court agreed with the IRS and disallowed the deduction.
Tip of the Day
Dependent care vs. education expenses . . . You can take a credit for dependent care expenses incurred to allow you (and your spouse if married) to be gainfully employed. The portion of expenses for education, or, if you have a live-in housekeeper, the portion for household services don't qualify as dependent care. Expenses for pre-school qualify in full, but not those for a child in kindergarten or a higher grade. For example, you're a single mom and send your daughter to a boarding school because your job requires extensive travel. The school provides education, meals, and housing to the child in addition to care. You must allocate the cost of the boarding school between expenses for care and expenses for education and other services not constituting care. Only the cost of the boarding school that is for care qualifies as an employment-related expense for the dependent care credit.
April 3, 2008
News
You can't argue self-incrimination and invoke the Fifth Amendment privilege to avoid complying with an IRS summons. That's what the Court held in Annette Stoesser, M.D. (2008-1 USTC 50,191; U.S. District Court, Dist. N.M.). The Court also noted that the Fifth Amendment was not a valid defense since the IRS was not conducting a criminal investigation.
Tip of the Day
Deducting state income taxes . . . It can be complicated. Here's what you can deduct on Schedule A of your 2007 tax return:
The same rules apply to any local income taxes. Be careful. If you're using a computer to do your return, the program may automatically deduct an overpayment you applied to your estimated tax if you used the same software last year. Make sure you enter estimated payments in the right spot and that they carry to both Schedule A for a deduction and to your state return as an estimated payment.
April 2, 2008
News
The statute of limitations is generally three years. That's important if you're filing a refund claim. The law does provide an exception if you are financially disabled and no other person is authorized to act on your behalf. In Albert Bova and David Toner, Co-Executors of the Estate of Margaret Walsonavich (2008-1 USTC 50,193; U.S. Court of Federal Claims) the taxpayer was unable to manage her financial affairs due to mental impairment. The Court noted the individual had a power of attorney in place. The executors of the estate argued the power of attorney contained a clause that it was not to be activated until the taxpayer's disability became apparent. The Court sided with the IRS in holding there was a power of attorney in place and the statute of limitations could not be extended.
Under the Electronic Federal Tax Payment System (EFTPS) you must deposit employment taxes electronically if your required deposits exceed a certain threshold. In Fallu Productions, Inc. (2008-1 USTC 50,199; U.S. District Court, So. Dist. N.Y.) the Court found the taxpayer liable for the failure to deposit penalties for failing to make its deposits for several quarters electronically, despite the fact that the deposits were made on time.
Tip of the Day
Deductible taxes . . . While businesses can usually deduct most taxes and fees as a business cost, the deduction for individuals is limited. You can deduct on Schedule A real estate taxes levied on the property based on the assessed value and charged uniformly. (You can't deduct taxes charged for local benefits and improvements that increase the value of your property.) If you bought a home during the year, you can deduct only the taxes you're responsible for starting on the date of purchase. For 2007 you can deduct either your state income taxes paid in 2007 or sales taxes, either the actual amount paid or an amount based on the IRS table plus sales taxes you actually paid on certain items such as motor vehicles, aircraft, boats, homes, and home building materials. Personal property taxes are deductible if they're charged on personal property, based only on the value of the personal property, and charged on a yearly basis, even if collected more or less than once a year. Taxes based on another method, such as the weight of a motor vehicle, are not deductible on Schedule A. Certain occupational taxes such as payments to the California Nonoccupational Disability Benefit Fund, etc. are deductible as taxes.
April 1, 2008
News
Notice 2008-42 (IRB 2008-15) provides guidance regarding the application of Sections 101(j) and 264(f) to life insurance contracts that are subject to split-dollar life insurance arrangements. Specifically, this notice provides that a modification of a split-dollar life insurance arrangement that does not entail any change to the life insurance contract underlying the arrangement will not be treated as a material change in the life insurance contract for purposes of Sections 101(j) and 264(f).
Tip of the Day
Health insurance costs for self-employed . . . You can deduct, on line 29 of Form 1040, insurance premiums for medical and qualified long-term care on behalf of yourself, your spouse and your dependents. You're considered self-employed if you filed a Schedule C, were a general partner (or a limited partner receiving guaranteed payments) or received wages from an S corporation and were a more than 2% shareholder. The insurance plan must be established under your trade or business and the deduction cannot be more than your earned income from that trade or business. In addition, you cannot take this deduction for any month in which you were eligible to participate in any subsidized health plan maintained by your employer or your spouse's employer.
Copyright 2008 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.--ISSN 1089-1536