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February 3, 2012

News

Revenue Ruling 2012-3 (IRB 2012-8) describes how the qualified joint and survivor annuity (“QJSA”) and the qualified preretirement survivor annuity (“QPSA”) rules, described in Secs. 401(a)(11) and 417 of the Code, apply when a deferred annuity contract is purchased under a profit-sharing plan.

Revenue Ruling 2012-4 (2012-8) describes whether a qualified defined benefit pension plan that accepts a direct rollover of an eligible rollover distribution from a qualified defined contribution plan maintained by the same employer satisfies Secs. 411 and 415 of the Code in a case in which the defined benefit plan provides an annuity resulting from the direct rollover.

The IRS has issued updates of the following publications:

Pub. 15-A Employer's Supplemental Tax Guide
Pub. 51 Circular A, Agricultural Employer's Tax Guide
Pub. 504 Divorced or Separated Individuals
Pub. 523 Selling Your Home
Pub. 526 Charitable Contributions
Pub. 550 Investment Income and Expenses
Pub. 587 Business Use of Your Home (Including Use by Day-Care Providers)
Pub. 596 Earned Income Credit
Pub. 907 Tax Highlights for Persons With Disabilities
Pub. 925 Passive Activity and At-Risk Rules
Pub. 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments (For Individuals)
Pub. 4845 Key Points About Residential Energy Credits

Tip of the Day

Relocating? Who will move with you? . . . One company recently relocated a division only some 45 miles away. But the move was to another state and, because employees would have to deal with significant traffic and over $6 in tolls each way, many more than management anticipated decided not to make the move. In fact, some key employees didn't follow. While the move looked great on paper (consolidation into one location, ability to utilize company-owned vacant space, etc.) no one bothered to find out who would make the move. The first step may be to identify your key people and find out if they'll join you. If not, can they be replaced at the new location?

February 2, 2012

News

The Code gives a credit for fuel taxes paid on diesel consumed in an off-highway business use. In Myles Lorentz Inc. (138 T.C. No. 3) used specialized but highway-legal trucks (known as "tractors") and "belly-dump" trailers in its business. The company's tractors operated most economically off highway. The tractors and trailers were modified for heavy use, but no legal or technical obstacles prevented the company from driving either tractors or trailers on highways. The tractors could pull trailers other than the belly-dump trailers; likewise, the trailers could be moved by vehicles other than the taxpayer's tractors. Approximately 40 percent of the company's tractors' mileage during the years in question occurred off highway. For tax years ending January 31, 2005, and January 31, 2006, the taxpayer claimed credits under Secs. 34(a)(3) and 6427(l)(1), for its tractors' "nontaxable use", under the "off-highway business use" exception of Sec. 6427(l)(2). The IRS disallowed the credits. The taxpayer stipulated that its tractors and trailers were "highway vehicles" under Sec. 6421 per sec. 48.4061(a)-1(d)(1), Manufacturers & Retailers Excise Tax Regs., but argues that the "special-design" and "substantial impairment" exception of sec. 48.4061(a)-1(d)(2)(ii), Manufacturers & Retailers Excise Tax Regs., applies, making them off-highway vehicles and the fuel they use off-highway creditable. The Court held the tractors and trailers are not analyzed together for purposes of interpreting the term "vehicle". The plain language of sec. 48.4061(a)-1(d)(1), Manufacturers & Retailers Excise Tax Regs., and the fact that the tractors and trailers could each perform their designed functions paired with other vehicles indicate that tractors and trailers are each a distinct "vehicle" for purposes of the credit. The Court also held the tractors were not specially designed for off-highway use because, while "heavy duty" modifications allowed them to work off highway, they were in most respects identical to unmodified tractors used on highway and were not designed to transport a particular type of load. The Court held further that the tractors were not substantially impaired with respect to on-highway use because they could fit and operate on a highway at regular highway speeds and the tractors do not qualify for the "off-highway transportation" exception in sec. 48.4061(a)-1(d)(2)(ii), Manufacturers & Retailers Excise Tax Regs. Finally, for the tax year ending January 31, 2006, I.R.C. Sec. 7701(a)(48) defines "highway vehicle" even more narrowly such that P's tractors do not constitute off-highway vehicles.

Tip of the Day

Head of household status . . . If you can claim such status you're able to use lower tax rates. To qualify you must be either unmarried or considered unmarried on the last day of the year. You're considered unmarried on the last day of the tax year if you file a separate return, paid more than half the cost of keeping up your home for the tax year, your spouse did not live in your home during the last six months of the tax year (temporary absences don't count), your home was the main home of your child, stepchild, or foster child for more than half the year, and you must be able to claim an exemption for the child. (Special rules apply if the noncustodial parent can claim the child.)

February 1, 2012

News

The IRS and the Justice Department have reported (IR-2012-13) a massive national sweep cracking down on suspected identity theft perpetrators. Check cashing establishments were a part of the investigation. The IRS reported 69 indictments. The IRS wants taxpayers to know if they receive a notice from the IRS indicating they may be victims of identity theft, they should follow the instructions in that notice. A taxpayer who believes they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. The taxpayer should contact the IRS Identity Protection Specialized Unit at 800-908-4490. The taxpayer will be asked to complete the IRS Identity Theft Affidavit, Form 14039, and follow the instructions on the back of the form based on their situation. Taxpayers looking for additional information can consult the Taxpayer Guide to Identity Theft or the IRS Identity Theft Protection page on the IRS website.

The IRS has released a Fact Sheet (FS-2012-4) providing information on when individual taxpayers can expect their refunds. The Service is cautioning taxpayers it is increasing scrutiny of tax returns for signs of fraud. This means some tax refunds will face additional screening and review before being released, which will add time before the refund is delivered. You can check the status of your refund at Where's My Refund?. You can also download the free IRS2Go phone app at the Apple Store and the Android Marketplace.

Tip of the Day

Residential energy credit . . . It's still in effect, but there are some changes. The nonbusiness energy credit property is equal to the sum of 10% of the amount paid or incurred for qualified energy efficiency improvements installed in 2011, and any residential energy property costs paid or incurred in 2011. Before you start digging up your receipts, there is a lifetime limit of $500 for all years after 2005, of which only $200 can be for windows; $50 for any advanced main air circulating fan; $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and $300 for any item of energy efficient building property. If you haven't hit the limit, qualifying items include insulation, exterior windows (including skylights), exterior doors, special roofing materials, certain furnaces, heat pumps, and main air circulating fans.

January 31, 2012

News

The chances for extension of the payroll tax cut appear to be improving. The open issue is how the cut will be funded.

The rental of real property generally produces passive income which can be offset by passive losses. But the rental of real property to property to an trade or business in which you materially participate is income not from a passive activity. For example, you own real property you rent to your S corporation (in which you materially participate) that manufactures tractor parts. Any income generated cannot be used to offset passive losses. Without this provision in the law, the business could pay a high rent for the use of the property, creating artificial income. But a special relief provision in the law allows a taxpayer to use the old rules (the income would be passive) if the income it is attributable to a rental pursuant to a written binding lease that was entered into before February 19, 1988. In L.A. Samarasinghe et ux. (T.C. Memo. 2012-23) the taxpayer claimed he qualified under that exception (the lease was signed in 1980). The Court looked at both state law (New Jersey) and the lease. It found that the terms of the lease had not been complied with. Checks were issued by the corporation to the taxpayer without indicating the nature of the amounts paid. Only at yearend was an allocation made for the rent. In addition, while the lease specified rent increases, the correct amount was not calculated. The Court held that because of the noncompliance, the preexisting lease exception was not applicable and the rental income was not from a passive activity.

Tip of the Day

Airline reward miles taxable? . . . It depends. In Announcement 2002-18 the IRS held that reward points for frequent flyer miles received by employees who charged business trips on their card (and were reimbursed for the airfare) were not taxable. In that situation the IRS considered the miles received to be similar to a rebate of the price paid rather than taxable income. But now a bank that gave customers frequent flyer miles for opening an account has included the value on a 1099-MISC. While the IRS has not officially ruled as to whether these miles are taxable, there's a difference between them and the free miles received for purchasing tickets on a card. You may not agree with the bank's (or other company's) decision to report the amounts as income, but if you don't report the 1099 amount on your return you'll most likely get a notice from the IRS demanding the additional taxes, interest and penalties.

January 30, 2012

News

The IRS and community partners nationwide launched their annual outreach campaign (IR-2012-11) aimed at helping millions of Americans who earned $49,078 or less take advantage of the Earned Income Tax Credit (EITC). The outreach campaign is necessary because one-third of the eligible population changes annually as their financial, marital and parental statuses change. Although an estimated four out of five eligible workers and families get the credit, one in five still miss out on it, either because they don't claim it, or don't file a return at all. The EITC varies by income, family size and filing status. People can see if they qualify by visiting IRS.gov and answering a few questions using the EITC Assistant. Workers who earned $49,078 or less from wages, self-employment or farm income last year could receive larger refunds if they qualify for the EITC. That could mean up to $464 in EITC for people without children, and a maximum credit of up to $5,751 for those with three or more qualifying children. Unlike most deductions and credits, the EITC is refundable. In other words, eligible people may get a refund from the IRS even if they owe no tax. For more information see IRS Publication 596, Earned Income Credit.

Tip of the Day

$44 million for a hospital stay? . . . Fortunately, it was a billing error. But it made the news. But making an obvious mistake on a customer's invoice will be embarrassing even if it doesn't hit the headlines. There may be steps you can take. One is to flag all invoices over a certain dollar amount for review. Small business owners often have a limited number of customers so that a quick manual review by someone can often be done. If you can't do that, periodically test check some invoices to make sure your system is working correctly. The advice applies to the flip side--make sure you don't pay an incorrect invoice. If you deal in goods, make sure there's a receiving report supporting the invoice. In all cases tell your employees to check large or unusual invoices. Any expense questioning a good invoice will be more than offset by savings from catching errors.

January 27, 2012

News

The White House has issued a fact sheet detailing its job growth proposals for the economy. The provision that stands the best chance of making it through Congress is a 100% expensing option (similar to the now expired 100% bonus depreciation) that would allow an immediate write off in equipment and plants. There are other incentives including lower taxes for manufacturing enterprises and R&D, and disincentives for moving jobs overseas.

Section 1045 allows a taxpayer, other than a corporation, to defer recognition of gain on the sale of qualified small business stock held by a taxpayer for more than 6 months by purchasing qualified small business stock. There is a timing requirement and, in order to qualify as a qualified small business, the entity must by in an active trade or business. Generally, businesses involving the performance of services in the fields of health, law, consulting, financial services, etc. where the principal asset of the business is the reputation or skill of 1 or more of its employees don't qualify. In John P. Owen et al. (T.C. Memo. 2012-21) the taxpayer sold his interest in an insurance company. The IRS argued that company was not a qualified business because one of the principal assets was the skill of the taxpayer. The Court sided with the taxpayer, noting that the principal asset of the companies was the training and organizational structure. The Court also found the taxpayer met the timing requirement for making the election. However, the Court held that the taxpayer didn't meet the requirement to invest in another qualified small business. While the taxpayer invested close to $2 million in the new business, during the first six months only some 8% of the business assets were invested in qualifying assets (inventory in this case), not the required 80%. The Court the sale proceeds did not qualify for the gain deferral under Sec. 1045.

Tip of the Day

IRS levy on wages enforceable . . . It's not unusual for an employer to receive a order from the IRS requiring him or her to garnish an employee's wages an remit the amounts to the IRS. It's not unusual for an irate employee to try to take action against the employer, often threatening to sue. Fortunately, Section 6332 of the Internal Revenue Code clearly insulates an employer (or other private defendant) from suit for complying with an IRS tax levy.

January 26, 2012

News

Congress is going back to work on legislation to extend the payroll tax relief that expires at the end of February. But the parties are no closer to compromise than when they agreed to the two-month extension. Much of the problem stems from other additional, unrelated provisions both parties want to include in the legislation. While the relief is likely to be extended, it's also likely legislation won't be passed until the last minute.

Even if you own 100% of a business, be it a sole proprietorship, LLC, partnership, or S corporation, you can't deduct losses from the entity unless you can show you materially participate in the business. That is, you're involved in the activity in managing or working in the business. Showing up once a week to review the books for two hours won't qualify as material participation; participation must be substantial. There are several ways to show material participation, but most business owners will pass the test using the more than 500 hour rule. In Alfred A. Iversen et ux. (T.C. Memo. 2012-19) the taxpayer was the founder of a large manufacturer of surgical and medical equipment in Minnesota. He also owned a working cattle ranch with 14,000 owned and 28,000 leased acres operated as an LLC. The ranch generated losses and the taxpayer claimed he materially participated in the operation. The IRS claimed the taxpayer did not, and disallowed the losses. The taxpayers lived in Minnesota and flew to the ranch either alone or with guests. The Court noted participation in an activity may be shown by any reasonable means, including calendars, appointment books, or narrative summaries identifying work performed and the approximate number of hours spent performing the work. Contemporaneous daily time reports, logs, or similar documents are not required if other reasonable means exist of establishing a taxpayer's participation. Neither of the taxpayers maintained a log, diary, notes or other record of the work performed. The taxpayers claimed they spent 2 to 3 hours a day on telephone calls, emails, and fax communications with the ranch manager. Telephone records introduced did not support that claim. Airplane logs indicated few trips during one of the years at issue and the trips were only for a day. Moreover, a family member went along. The Court also noted that the fact that the airplane flights were paid for by the taxpayer's corporation, not the ranch, indicated the time spent at the ranch often and primarily related to the affairs of the corporation. In addition, the presence at the ranch of a full-time paid ranch manager for most of 2005 and 2006 disqualifies much of the taxpayer's time working on ranch activities from counting under the facts and circumstances test (an alternate test for material participation). The Court concluded the taxpayer failed to show he materially participated in the activity.

Tip of the Day

Too long? Too short? . . . If you've got a good contract you'd like it to last forever. But sometimes even the best deal can age poorly. Leases are one area where terms can extend far into the future. As a landlord having a long lease can increase the value of a property since a lender or buyer knows the space won't go vacant with the associated costs and revenue loss. But that lease can be a liability if the rent increases don't keep pace with rising costs. The same is often true for other contracts. Consider a shorter term with renewal options or clauses to allow for changes over time. Talk to an attorney who understands the field or industry.

January 25, 2012

News

If you're acquiring the assets of a business or just a group of assets in a single purchase, you have to allocate the purchase price among the assets. For example, you purchase two retail stores from a large chain that's abandoning a market. The purchase includes land, a building, and store fixtures. The land can't be depreciated, the building is depreciated over 39 years, and the store fixtures over 5 years. Generally both parties agree on the allocation between the various items and that allocation is binding for tax purposes. Clearly, it's in the buyer's best interest to allocate as much to 5-year assets; the seller wants as much as possible allocated to the land which will produce all long-term capital gain. In Peco Foods, Inc. & Subsidiaries (T.C. Memo. 2012-18) the taxpayer purchased two poultry processing plants from two different sellers. In both cases the taxpayer and the seller agreed on a purchase price allocation. In the first (Sebastopol), the price was allocated among 26 assets; the second (Canton) was simpler. The purchase price was allocated among three assets--land, improvements, and machinery, equipment, furniture, and fixtures. Some time after the acquisition, the taxpayer applied for a change in accounting method to claim additional depreciation as a result of changes in the life of certain assets and in the Canton acquisition the subdivision of real property: improvements into component parts. The Court noted when the parties agree to an applicable asset acquisition agree in writing as to the allocation of the consideration or as to the fair market value of any of the assets, that agreement "shall be binding" on both the buyer and the seller unless the IRS determines that the allocation is not appropriate. However, where the parties to an applicable asset acquisition do not agree in writing to allocate any part of the consideration of the acquired assets, the residual method of section 338(b)(5) applies to determine the buyer's basis in, and the seller's gain or loss from, each of the assets transferred. The Court held the original agreements (allocation) were binding in both cases, and in the Canton acquisition, the taxpayer could not subdivide the assets.

Tip of the Day

No bad debt deduction for cash method taxpayers . . . It's a well-settled issue, but some business taxpayers still think you can take a deduction for an unpaid invoice if you're on the cash method of accounting. You can't. And the reason is simple when you think about it. Under the cash system you only pay tax on money you receive. Since you never paid tax on the money, you can't take a deduction. (You're still getting a deduction for your cost of goods sold, labor, etc. on the return.) Under the accrual system you're reporting income even if you don't receive the cash or check, so if you can't collect, you've got a bad debt deduction.

January 24, 2012

News

The IRS can deny losses related to a purported business activity if it believes the activity was not engaged in with a profit motive. The courts generally examine nine factors, finding each one either favors the taxpayer, the IRS or is neutral. The courts do not have to give equal weight to each factor. In Peter C. Bronson et ux. (T.C. Memo. 2012-17) the taxpayers (the husband was a lawyer; the wife was not employed at the time) were engaged in breeding Welsh ponies and cobs. Mrs. Bronson had managed the operations of an 85-acre cooperative equestrian barn which provided boarding services and devoted substantial time during the years at issue to the horse activity. The Court examined the taxpayers records and arguments in detail, noting they did little advertising, failed to acquire a facility for the horses at any reasonable pace, boarded several horses on the east coast despite their California location, their recordkeeping fell short of businesslike because of the failure to maintain separate records for each animal's performance, lacked prior expertise, much of Mrs. Bronson's time was involved substantial personal and recreational aspects, and increasing losses in the later years of the activity. The Court held the taxpayers lacked the requisite "actual and honest objective of making a profit" with respect to the activity.

Form 1099 and W-2 deadline . . . While you have until February 28 to send 1099s and W-2s to the IRS, the forms must be in the mail to recipients by January 31. There are penalties for failing to send them out on time. The threshold for 1099-MISC is $600 (these are the ones due to independent contractors, etc.); the threshold for interest payments is $10. You probably know you owe a 1099-MISC to Fred who provides delivery services and Sue who provides consulting services, but you also owe one to the shop that fixes the company trucks, and the electrician who rewired the shop. You don't have to send a 1099-MISC to a corporation (unless it provides medical or legal services). For more information go to our article Form 1099 Reporting Requirements.

January 23, 2012

News

The IRS has issued final regulations (T.D. 9573) relating to the exclusion from gross income for amounts received on account of personal physical injuries or physical sickness. The final regulations reflect amendments under the Small Business Job Protection Act of 1996. The regulations specify that Sec. 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. Emotional distress is not considered a physical injury or physical sickness. However, damages for emotional distress attributable to a physical injury or physical sickness are excluded from income. Section 104(a)(2) also excludes damages not in excess of the amount paid for medical care (described in Section 213(d)(1)(A) or (B)) for emotional distress. For purposes of this paragraph (c), the term damages means an amount received (other than workers' compensation) through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution. These regulations apply to damages paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, and received after January 23, 2012. This September 13, 1995, effective date derives from an exception set forth in section 1605(d)(2) of the 1996 Act to the statutory effective date of the amendments to section 104(a)(2).

In T.C. Memo. 2012-16 Sec. 6662; accuracy-related penalty; gross valuation misstatement; capital losses; lack of economic substance.Scott A. Blum et ux. (T.C. Memo. 2012-16) the taxpayers, through a grantor trust, entered into an Offshore Portfolio Investment Strategy (OPIS) transaction through an accounting firm. Through direct and indirect interests in UBS stock, they created a $45 million loss. They claimed the loss for tax purposes but did not, in fact or substance, incur a $45 million loss. The taxpayers were pursued by the accounting firm to enter the transaction when the firm became aware that the taxpayers would have a substantial capital gain. The accounting firm issued an opinion, after the fact, that the $45 million capital loss would "more likely than not" be upheld. The Court held that the OPIS transaction was to be disregarded under the economic substance doctrine. It also held the taxpayers liable for accuracy-related penalties for gross valuation misstatements and negligence under Sec. 6662(a).

Tip of the Day

Co-op funds . . . Many manufacturers and wholesalers provide funds to their distributors and retailers for advertising, demo equipment, point-of-purchase displays, etc. Generally, it's free money. There may be strings attached such as how the money can be used, that products from competing suppliers can't be advertised on the same page, etc., but for the most part the restrictions aren't onerous. Make sure you know the rules. The amount you receive is often based on your volume with the supplier over a 3, 6, or 12-month period. You usually have a certain amount of time to use the money and file a claim. Make sure someone is in charge of the program so you don't lose out. Finally, keep in mind that any amounts you receive constitute taxable income. But, of course, that will be offset by the cost of the ads, etc. If you're a manufacturer or supplier, you might consider instituting such a program for dealers.

January 20, 2012

News

Notice 2012-12 (IRB 2012-6) advises taxpayers that mandatory restitution payments awarded under 18 U.S.C. Sec. 1593 are excluded from gross income for federal income tax purposes. This law requires a defendant convicted of a human trafficking offense to make these payments to the victim to compensate for costs for medical services, physical and occupational therapy or rehabilitation, transportation, temporary housing, child care expenses, lost income, attorneys’ fees and other costs, and other losses the victim suffers as a proximate result of the offense.

Caltex Oil Venture et al. (138 T.C. No. 2) was an accrual-basis partnership, and entered into a turnkey contract under which it paid $5,172,666 by cash and note in December 1999 for the drilling of two oil and gas wells. Although some site preparation required under the contract occurred in 1999, no drill penetrated the ground for purposes of drilling a well by or on behalf of the partnership within 90 days after the end of 1999. The taxpayer claimed a full deduction for the $5,172,666 as intangible drilling costs (IDCs) on its 1999 Federal tax return. The IRS issued a notice of final partnership administrative adjustment to the partnership, determining, inter alia, that the partnership was not entitled to deduct the IDCs because the economic performance requirement of Sec. 461(h) was not satisfied. The Tax Court held that for purposes of Sec. 461(i)(2)(A), "drilling of the well commences" when there is actual penetration of the ground surface in the act of drilling for purposes of spudding a well. Mere site preparation is insufficient. Under this special timing rule, the partnership did not satisfy the economic performance requirement of Sec. 461(h) and the amounts were not deductible in 1999. The Court also held that the 3-1/2-month rule of Reg. Sec. 1.461-4(d)(6)(ii) does not enable the partnership to treat any of the services due under the contract as having been economically performed in 1999, because, in the case of an undifferentiated, non-severable contract, the 3-1/2-month rule contemplates that all of the services called for must be provided within 3-1/2 months of payment. The Court further held that, in the alternative, if the partnership is able to invoke the 3-1/2-month rule and treat some of the services due under the contract as having been economically performed in 1999, then deductions under the 3-1/2-month rule are limited to payments of cash or cash equivalents and do not include payments made by notes.

You may be able to settle your debts with the IRS for less than the full amount by making an offer in compromise. But you'll have to provide financial information and show that, even with liquidating assets, you can't pay the full amount. In Darrell L. Titsworth et ux. (T.C. Memo. 2012-12) the IRS Settlement Officer rejected the taxpayer's offer in compromise. The taxpayer's made a $500 offer on $33,652 in unpaid Federal income tax liabilities. The taxpayer had invested in real estate and owned a number of properties. In addition to information provided by the taxpayer, the Settlement Officer (SO) reviewed third party information involving real estate holdings, check registers, and bank records. The SO stated an accurate analysis was not possible because the taxpayer failed to provide documents or fully disclose assets and continued to engage in real estate transactions. The SO also noted that the taxpayer failed to disclose assets for which they claimed depreciation. Tax Court agreed with the IRS that the taxpayers had enough assets to pay the full amount of their liability, noting that they had more properties than they reported and dissipated some $150,000 in assets. (Dissipated assets include liquid or nonliquid assets that "have been sold, gifted, transferred, or spent on non-priority items or debts and are no longer available to pay the tax liability.")

Tip of the Day

Valuing rental property . . . When you're buying a house the appraiser may use several methods, but the selling price of comparables in the area is usually the one that determines the value. That's not true for investment properties such as apartment buildings, office buildings, etc. For these properties the cash flow from the property is what generally determines the value. While location and certain other factors go far in determining the cash flow, management can be a critical factor. A good manager can buy a property cheaply and turn it into a cash cow by getting the building fully leased, increasing rents, cutting costs, etc.

January 19, 2012

News

Revenue Procedure 2012-15 (IRB 2012-7) updates Rev. Proc. 2011-13 and identifies circumstances under which the disclosure on a taxpayer’s income tax return with respect to an item or a position is adequate for the purpose of reducing the understatement of income tax penalty under Section 6662(d) and the purpose of avoiding the tax return preparer penalty under Section 6694(a). The revenue procedure applies to any income tax return filed on 2011 tax forms for a taxable year beginning in 2011, and to any income tax return filed on 2011 tax forms in 2012 for short taxable years beginning in 2012.

Income is reportable if you didn't receive a 1099. In Yulia Feder (T.C. Memo. 2012-10) the taxpayer claimed to have canceled an insurance policy in 1988, sending the company a letter requesting the cancellation. The letter also provided a change of address. In 2008 the company issued to the taxpayer a 1099-R for the year 2007 reporting a gross distribution of $12,654 and a taxable amount of $5,625. Unfortunately, the company sent the 1099-R to the only address it had on file, an address not used by the taxpayer since 1987. Unaware of the 1099-R, the taxpayer did not report the income. The policy remained in force because when the taxpayer stopped making premium payments the policy's automatic premium loan provision went into effect and the company loaned the taxpayer $73 each quarter to pay the premiums. The Court noted that if an information return, such as a Form 1099-R, serves as the basis for the determination of a deficiency, Section 6201(d) may apply to shift the burden of production to the IRS. Section 6201(d) provides that in any court proceeding, if a taxpayer asserts a reasonable dispute with respect to the income reported on an information return and the taxpayer has fully cooperated with the IRS, then the Service has the burden of producing reasonable and probative information in addition to the information return. The IRS did so by introducing a declaration from the company including how the income was calculated. The Court held the $5,625 was taxable income.

Tip of the Day

Deducting mortgage interest and real estate taxes . . . You can only claim an mortgage interest deduction on a residence that you own. In one case the taxpayers signed a contract to purchase a house to be used as a residence. Prior to closing on the property, they rented it from the sellers. The taxpayers deducted interest and real estate taxes during the rental period. The court held that they had neither legal nor equitable title under state law and could not take the deductions. Mere possession didn't qualify. Note. In some cases you don't need to have legal title. It can be sufficient that you have all the "benefits and burdens" of ownership. Check with your tax advisor.

January 18, 2012

News

The IRS has announced (IR-2012-7) the opening of the 2012 electronic tax return filing season today. The IRS is reminding taxpayers they can e-file their tax returns one of three ways: through a tax return preparer, through self-preparation software or through IRS Free File. The IRS does not charge for e-file. Many tax return preparers and software products also offer free e-filing with their services. Free File offers free tax preparation and free electronic filing. Starting this filing season, any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically. Taxpayers are encouraged to use tax return preparers who offer IRS e-file. Taxpayers should also only use paid preparers who sign the returns they prepare and enter their Preparer Tax Identification Numbers (PTINs). Preparers are required to sign the returns they prepare and include their PTINs. Although paid preparers sign returns, taxpayers are legally responsible for the accuracy of every item on their return. Preparers are also required to give taxpayers a copy of their returns. When using e-file, you also use an e-signature and an electronic filing PIN. If you prepare your own return using software you must use the self-select PIN method on the return. When using a paid preparer, you can still use the self-select PIN method or the practitioner PIN method. The Electronic Filing PIN is a temporary PIN used by the IRS to verify your identity when you e-file. IRS Free File also begins today, Jan. 17. Everyone can use Free File, either the brand-name software offered by IRS’ commercial partners or the online fillable forms. Individuals or families with 2011 adjusted gross incomes of $57,000 or less can use Free File software. Free File Fillable Forms, the electronic version of IRS paper forms, has no income restrictions.

Whether or not life insurance proceeds are part of your taxable estate depends on who owns the policies. If the decedent was the owner, they're includable in the estate. If a spouse, relative or other party owns them, the proceeds are not includable in the estate and escape all taxes. In Estate of Dwight T. Fujishima et al. (T.C. Memo. 2012-6) the taxpayer contended that two policies, although shown in the issuing companies' records as owned by decedent, were in fact owned by his wife. She testified that she paid the premiums, and she produced copies of three canceled checks dated in 2003 and 2004 payable the insurance company. She claimed that the record of the company showing decedent as the owner was a mistake by the agent, but she could not produce any documents concerning the policy or the testimony of the agent. The IRS argued that the inclusion of the policies on the estate tax return undermines the taxpayer's argument that the wife intended to be the owner of the policies and that it would be illogical to treat the policies inconsistently. The IRS also relied on inclusion of the policy on the estate tax return as an admission. Without any corroboration of the wife's conclusory and subjective testimony as to her intent, the Court concluded that the record ownership of one policy is the most persuasive evidence and that the admission as to the second policy by reporting it as an asset of the estate on the estate tax return has not been overcome. Rather than being the owner of the policies, it is more likely that she paid for them on behalf of decedent and her other son, just as she paid other expenses for decedent during his lifetime. The Court held the values of the policies includable in the estate.

Taxpayers have considerable flexibility in how they organize their business and tax affairs. Most approaches won't be challenged by the IRS, but there is a limit. In Ashley M. Walker et al. (T.C. Memo. 2012-5) Donald Walker, a dentist, set up his practice in an LLC (Walker LLC) with Walker owing 1 percent of the interest and L & R, another LLC, owning 99 percent. L & R's members consisted of the Walker children who reported the L & R's income on their tax returns and paid tax on the income. The Court noted that L & R conducted no business in its own name, had no employees, was not involved in the practice of dentistry, other than by its alleged ownership of 99 percent of the Walker LLC, and did not have any licenses or permits to practice dentistry. No individuals other than Donald Walker contributed any property to L & R. The Court noted that under the assignment of income doctrine, taxpayers may not shift their tax liability by merely assigning income that the taxpayer earned to someone else. The Court held the only apparent purpose of L & R was tax avoidance and that L & R lacked economic substance and was therefore disregarded for tax purposes.

Tip of the Day

Take a bad debt deduction on a loan to a relative? . . . You can treat loans to relatives just as you would those to nonrelatives, including taking a bad debt deduction. However, the IRS will scrutinize them much more closely. In one case a court upheld a Tax Court ruling that disallowed a loss the taxpayers claimed on loans they made to their son-in-law. The court found the taxpayers didn't show their was a debtor-creditor relationship since they couldn't show they had any expectation of repayment. There's a better chance the loan will pass muster if you have a signed promissory note, charge adequate interest, have a reasonable stated term (e.g. 1-10 years, unless its a loan on real estate), and there are regular (e.g., monthly) repayments, have collateral, etc. Basically, the loan terms should be similar to what a bank or other commercial lender would impose. You want to make sure you've crossed your t's here. Talk to your accountant.

January 17, 2012

News

The IRS has announced (Rev. Proc. 2012-13, IRB 2012-3) the maximum value of employer-provided vehicles first made available to employees for personal use in calendar year 2012 for which the vehicle cents-per-mile valuation rule may be applicable is $15,900 for a passenger automobile and $16,700 for a truck or van. The maximum value of employer-provided vehicles first made available to employees for personal use in calendar year 2012 for which the fleet-average valuation rule may be applicable is $21,100 for a passenger automobile and $21,900 for a truck or van.

Notice 2012-11 (IRB 2012-5) provides transitional relief from information reporting requirements in Section 6045B that apply to issuers of stock with respect to organizational actions that affect the basis of the stock. This notice provides that posting either Form 8937, Report of Organizational Actions Affecting Basis of Securities, or the required information in a readily accessible format to an issuer’s primary public Web site will satisfy an issuer’s requirement to file and furnish Form 8937 for organizational actions occurring in 2011. This notice also provides that the IRS will not impose penalties for reporting incorrect information against issuers under sections 6721 or 6722 related to filing and furnishing Form 8937 for 2011 organizational actions provided that they make good-faith efforts in timely posting the Form 8937 or the required information on the issuers’ primary public Web sites or filing accurate Forms 8937 and furnishing the corresponding issuer statements.

The IRS has issued temporary regulations (T.D. 9571) that provide guidance regarding the allocation and apportionment of interest expense. These temporary regulations provide guidance concerning the allocation and apportionment of interest expense by corporations owning a 10 percent or greater interest in a partnership, as well as the allocation and apportionment of interest expense using the fair market value method. These temporary regulations also update the interest allocation regulations to conform to the statutory changes made by the Education Jobs and Medicaid Assistance Act (EJMAA), enacted on August 10, 2010, affecting the affiliation of certain foreign corporations for purposes of Section 864(e). These regulations affect taxpayers that allocate and apportion interest expense. The text of these temporary regulations also serves as the text of the proposed regulations (REG-113903-10).

In Ann Marie Minihan et al. (138 T.C. No. 1) the taxpayer petitioned for review of the IRS's denial of innocent spouse relief under and the IRS created a separate account for each spouse in order to pursue collection from the taxpayer's former husband while collection against the taxpayer was suspended pursuant to Sec. 6015(e)(1)(B) (innocent spouse relief). While the taxpayer's petition was pending, the IRS collected the entire tax liability at issue by levying on a bank account owned jointly by the taxpayer and her former spouse. As a result, the taxpayer sought a refund pursuant to Sec. 6015(g)(1), in the amount of 50% of the funds levied from the joint account. The IRS contended that she was not entitled to a refund of funds owned jointly by her and her former husband and applied to the ex-spouse's liability. The Court held that under State law the taxpayer owned a 50% share of the funds held in the joint bank account, and she was not precluded from a refund under Sec. 6015(g)(1) of her share of levied funds.

Tip of the Day

Find a mistake on your W-2? . . . If your employer makes a mistake on your W-2 take it up with him. You can't ignore the amount on the W-2, even if it's clearly incorrect. If you don't report the amount on the W-2, the IRS will make the adjustment and most likely impose the accuracy-related penalty. Best approach? Keep all your pay stubs, at least until you get your W-2. When you receive your W-2 check both the gross pay and the withholdings for federal and state taxes. If you find and error and your employer won't adjust your W-2, contact the IRS for assistance.

January 13, 2012

News

National Taxpayer Advocate Nina E. Olson has released her annual report to Congress, identifying the combination of the IRS's expanding workload and declining resources as the most serious problem facing taxpayers. The result, the report says, is inadequate taxpayer service, erosion of taxpayer rights, and reduced tax compliance. The Advocate expressed her continuing concern that the IRS's expanding use of automated processes to adjust tax liabilities is causing harm to taxpayers and recommended that Congress enact a comprehensive Taxpayer Bill of Rights. For more information see IR-2012-6.

When are you in business so that you can deduct expenses? One answer is once you start generating revenue. In Michael S. Oros (T.C. Memo. 2012-4) the taxpayer traveled to South America, Asia, Africa, and Australia with the intention of writing a book. He took some 4,500 photographs and maintained a contemporaneous journal in which he wrote about his different experiences. But some four years later he had not published or completed a book about his trip. On his 2006 tax return he deducted travel, meal, and telephone expenses for a total loss of $19,140. The Court noted that to be engaged in a trade or business a taxpayer must me regularly and actively involved in the activity. The Court said that while some of the facts in the record suggested the taxpayer was engaged in a trade or business (business plan, journal, etc.), it went on to say the taxpayer failed to present any evidence of continuous or repeated activity as an author, and he was a full-time employee. The Court denied a deduction for the claimed expenses.

In Javier L. Gaitan et al. (T.C. Memo. 2012-3) the taxpayer had a business exporting clothing. The IRS disallowed a subtraction for cost of goods sold amounting to $134,575. The taxpayer attempted to prove the amount by (1) receipts and (2) an American Express card, claiming such evidence substantiated $70,275 of the amount disallowed. The Court found four problems with the receipts:

• They did not indicated which purchases were for export and which were for the taxpayers' personal use.
  
• Many of the receipts were illegible.
  
• Many of the receipts did not clearly identify the purchaser.
  
• Some of the receipts show the purchases were made for another business the taxpayers' owned.

The Court noted that the production of the American Express credit card statements was also flawed. The Court sided with the IRS in disallowing the cost of goods sold deduction.

Tip of the Day

You can't have it both ways . . . Not infrequently taxpayers end up contradicting themselves. Don't forget the IRS can develop evidence on its own. In one case a taxpayer argued he was in the business of breeding dogs as a business. But on a request for a building permit submitted to the town for a kennel, he claimed it was for personal purposes in order to save property taxes. The court ruled the kennel was a hobby. Make sure you treat items consistently. At a bare minimum, failure to do so will hurt your credibility.

January 12, 2012

News

The IRS has released two Fact Sheets (FS-2012-7 and FS-2012-8) on identity theft informing taxpayers of the availability of additional information for taxpayers caught by identity theft as part of a larger, comprehensive identity theft strategy focused on fraud protection and victim assistance. The IRS has created a special section (www.irs.gov/privacy/article/0,,id=186436,00.html) on IRS.gov dedicated to identity theft matters, including tips for taxpayers and a special guide to assistance ranging from contacting the IRS Identity Protection Specialized Unit to tips to protect against "phishing" schemes. The IRS also is taking a number of additional steps this tax season to prevent identity theft and detect refund fraud before it occurs. You can find additional information at www.irs.gov/newsroom/article/0,,id=251501,00.html.

Making a gift of a conservation easement can provide tax benefits at little cost. But one of the requirements of a qualified conservation contribution is that it be made "exclusively for conservation purposes". The law provides that "A contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity". In Kayln M. Carpenter et al. (T.C. Memo. 2012-1) the IRS argued that the taxpayers' conservation easements were not protected in perpetuity because the conservation easement deeds allowed the parties to extinguish the easements by mutual agreement. The Court sided with the IRS, finding the easements failed to comply with the enforceability in perpetuity requirements.

Tip of the Day

Gifting business ownership . . . Still one of the best ways to save estate taxes is to make regular gifts of $13,000 ($26,000 if your spouse joins in the gift; both 2012 amounts) to each child (or other recipient). The gift will permanently escape estate taxes. But too many business owners wait until the business has prospered. That not only means you'll be able to give a smaller share of the business, valuation will be more difficult. For example, you start Madison Inc. with a $50,000 cash investment. At start up you can give your daughter a 20% interest ($10,000) and avoid gift tax consequences. Moreover, the IRS can't challenge the valuation; there's no working business and the only asset is cash. On the other hand, if you wait a few years till the business is worth $500,000, you can only gift a little more than 2% interest in any one year. And now the IRS can argue the value of the gift. They'll use several different valuation approaches including comparable price-earnings ratios. Fighting the valuation now can be costly and there's a good chance you'll lose. Talk to your tax adviser, but early gifts generally make sense.

January 11, 2012

News

The IRS has recently released updates of the following publications:

Pub. 17 Your Federal Income Tax
Pub. 502 Medical and Dental Expenses Including the Health Coverage Tax Credit
Pub. 523 Selling Your Home
Pub. 525 Taxable and Nontaxable Income
Pub. 527 Residential Rental Property (Including Rental of Vacation Homes)
Pub. 550 Investment Income and Expenses
Pub. 590 Individual Retirement Arrangements

More than one sole proprietorship? . . . If you operate more than one sole proprietorship, you've got to file separate Schedule C's for each one. That's not always easy to ascertain. If you're operating an auto body shop out of the same location as your auto repair, that's probably a single business. But if you have an auto repair business and also own an auto parts store, you should be filing two Schedule C's. Check with your accountant or tax advisor.

January 10, 2012

News

The IRS has announced ((IR-2012-5) the reopening the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs. The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced. The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers--or decide to end the program entirely at any point. For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011. Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

The IRS has issued Form 8937, Report of Organizational Actions Affecting Basis of Securities and the instructions. This is a new form that must be filed when an organizational action affects the basis of all holders of a security or all holders of a class of the security. For example, you must file Form 8937 if a corporation makes a nontaxable cash distribution to shareholders, a nontaxable stock distribution to shareholders, a stock split, etc. An S corporation can satisfy the reporting requirement if it reports the effect of the action on a timely filed Schedule K-1 for each shareholder and timely gives a copy to all proper parties. The form must be filed with the IRS on or before the 45th day following the organizational action or, if earlier, January 15 of the year following the calendar year of the action.

The IRS has just released an updated version of two forms Form 8867, Paid Preparer's Earned Income Credit Checklist and Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts.

Tip of the Day

Tell your accountant about all asset dispositions . . . When doing your business return your accountant may uncover sales of business assets if you've shown the revenue separately in your records. But he probably won't find them if you disposed of them in other ways such as scrapping them. Assets that have been sold may produce a gain or a loss, but if an asset is scrapped there's a good chance you'll have a deductible loss. If the assets are located in a state with a personal property tax, they might be included on the rolls and continue to be taxed if they're not taken off the books.

January 9, 2012

News

The IRS has released (IR-2012-4) a new set of tax gap estimates for tax year 2006. The tax gap is defined as the amount of tax liability faced by taxpayers that is not paid on time. The new tax gap estimate represents the first full update of the report in five years, and it shows the nation's compliance rate is essentially unchanged from the last review covering tax year 2001. The tax gap statistic is a helpful guide to the scale of tax compliance and to the persisting sources of low compliance, but it is not an adequate guide to year-to-year changes in IRS programs or to year-to-year returns on IRS service and enforcement initiatives. (Additional information is contained in FS-2012-6.)

In an IRS Legal Memorandum, the Service advised its agents that in limited circumstances, Revenue Agents certifying timely filed 2009 OVDP cases will be allowed to consider exercising discretion. Although examiners can consider exercising discretion, this does not mean that taxpayers who fall within the below mentioned categories will automatically have their cases resolved using discretion. The standards previously utilized for the 2009 OVDP discretion approach should be applied in determining whether the Revenue Agent will agree to propose an offshore penalty less than 20%.

Tip of the Day

Buy term and invest the difference . . . That phrase has been around a long time. The concept is save money by buying term insurance instead of whole life then take the savings in premiums and invest it yourself. But like any rule of thumb, it doesn't always work. The first question you should ask is the reason for buying the insurance. If you'll need coverage over the long term, buying whole life may make more sense. For example, your spouse or child has a chronic medical condition and you want to be sure there are funds available in case of your death. Buying term makes more sense if the need is for a shorter, fixed term. For example, you're trying to make sure your mortgage will be paid or there will be enough for your children's college. There are other considerations such as your medical situation. The second question is will you really invest the savings from going with term insurance? Many individuals think they will until they see a great deal on a vacation home, classic car, etc. Some individuals do invest the savings only to find out they've picked the wrong investments. Get advice from a financial professional, but consider your personal situation.

January 6, 2012

News

Once again individual taxpayers will get extra time this year to file their tax return. Since April 15 falls on a Sunday, returns would be due on Monday. But Monday is Emancipation Day in the District of Columbia, so tax returns across the nation will be due on Tuesday, April 17th.

Notice 2012-08 (IRB 2012-4) provides a proposed revenue procedure that would update Rev. Proc. 2003-61, which provides guidance regarding equitable relief from income tax liability under Section 66(c) and Section 6015(f). The proposed update to Rev. Proc. 2003-61 addresses the criteria used in making innocent spouse relief determinations for Section 6015(f) equitable relief cases and revises the factors for granting equitable relief. The factors have been revised to ensure that requests for innocent spouse relief are granted under Section 6015(f) when the facts and circumstances warrant and that, when appropriate, requests are granted in the initial stage of the administrative process. This proposed revenue procedure expands how the IRS will take into account abuse and financial control by the nonrequesting spouse in determining whether equitable relief is warranted. Review of the innocent spouse program demonstrated that when a requesting spouse has been abused by the nonrequesting spouse, the requesting spouse may not have been able to challenge the treatment of any items on the joint return, question the payment of the taxes reported as due on the joint return, or challenge the nonrequesting spouse’s assurance regarding the payment of the taxes. Review of the program also highlighted that lack of financial control may have a similar impact on the requesting spouse’s ability to satisfy joint tax liabilities. As a result, this proposed revenue procedure provides that abuse or lack of financial control may mitigate other factors that might otherwise weigh against granting equitable relief under Section 6015(f).

Revenue Ruling 2012-05 provides tables of covered compensation under Sec. 401(l)(5)(E) for the 2012 plan year. Section 401(l)(5)(E)(i) defines covered compensation with respect to an employee as the average of the contribution and benefit bases in effect under section 230 of the Social Security Act for each year in the 35-year period ending with the year in which the employee attains social security retirement age.

Tip of the Day

Check before you hit enter . . . Sending the same letter to 20 people sixty years ago required time-consuming effort and special equipment. Now we can send the same information to millions with a single keystroke--whether we intend to or not. More than one business has failed to proof a blanket e-mail, or sent the e-mail to unintended parties. That can be more than embarrassing--in some cases it can destroy a business. If the information is sensitive, restricted, etc. make sure someone reads it and checks the procedures before hitting send. Even a quick look by a co-worker might avoid a disaster.

January 5, 2012

News

Notice 2012-9 (IRB 2012-4) restates and amends the interim guidance on informational reporting to employees of the cost of their employer-sponsored group health plan coverage initially provided in Notice 2011-28, required under as part of the Affordable Care Act to provide useful and comparable consumer information to employees on the cost of their health care coverage. Notice 2012-9 includes modifications to several of the questions in Notice 2011-28 and adds a number of new Q&A's to provide additional guidance.

The IRS has updated the notice of tax relief for Virginia victims of the earthquake that took place on August 23, 2011. The area included in the notice now includes the counties of Culpeper, Fluvanna, Goochland, Orange and Spotsylvania and the City of Fredericksburg. For more information, go to www.irs.gov/newsroom/article/0,,id=249389,00.html.

Tip of the Day

New requirements for 2011 business returns . . . You may need to file a new form with your 2011 business tax return. Form 1125-A, Cost of Goods Sold must be attached if you have inventory. The form is identical to the Schedule A used for many years on From 1120S, 1120, 1065, etc. In addition, there's a new question to answer on business forms. You'll have to check a box as to whether or not you made any payments that would require you to file Form 1099. A follow-up question asks if you did or will file all required Forms 1099. Don't forget, you're signing the tax return under penalties of perjury.

January 4, 2012

News

The big disadvantage of operating as a C corporation is the potential tax liability on an asset sale of the corporation. That was the situation in Ray Feldman et al. (T.C. Memo. 2011-297). The taxpayer, along with other relatives, were the shareholders of a C corporation operating a dude ranch. The corporation sold the assets but was saddled with a $750,000 federal and state income tax liability. They entered into a transaction where an intermediary would purchased the shares followed by a transfer by the intermediary to the individual shareholders of the cash that would have been distributed to the shareholders that was in the corporation (before the payment of taxes, but less a premium to the intermediary). This was possible because of bad debts that would be transferred to the corporation by the intermediary that would offset the gain on the asset sale. The Court noted that all parties were aware that the intermediary had no intention of ever paying the tax liabilities of the corporation. The Tax Court noted that the Court of Appeals for the Seventh Circuit (to which this decision would be appealed) has stated generally that "It is well-established that the Commissioner is not required to recognize, for tax purposes, those transactions which lack economic substance." That Court noted that even if the transaction has economic effects, it must be disregarded if it has no business purpose and its motive is tax avoidance. The Court found that the only motive for the transaction was tax avoidance. Under Wisconsin law, the shareholders of a dissolved corporation may be liable as transferees to creditors of the corporation (and the IRS here) where the shareholders receive corporate assets as part of a dissolution. The Court held the taxpayers liable for unpaid tax liability.

In Frank Sawyer Trust of May 1992 (T.C. Memo. 2011-298) the facts were similar to those in the case immediately above. Four C corporations sold their assets leaving them with only cash and tax liabilities. An intermediary purchased the stock of the corporations. The IRS asserted the taxpayer (a trust) was liable for the tax liabilities as a transferee. In this case the IRS failed to show that the trust engaged in a fraudulent transfer under Massachusetts law. The Court noted there was no preconceived plan to avoid taxation. The Court noted the difference between this case and Feldman. It found the trust not liable as a transferee.

Tip of the Day

Looking for real estate? . . . If you want to pick up a bargain, look for a property with good "bones" and add finishing touches later. Many buyers want the works on closing--fieldstone fireplace, top-of-the-line kitchen, professional landscaping, etc. That will add to the price, but besides satisfying your ego it may not add much utility to the house. Consider going cheaper and doing the landscaping and kitchen exactly the way you want them later. Redoing a kitchen later may cost a little more, but it'll avoid you overreaching on the purchase. What you should look for is a sound property. Structural work such as foundation, drainage, plumbing, electrical, etc. problems can be very expensive to fix and won't provide much satisfaction. You should make sure the number and size of the rooms are adequate; adding square footage later can be expensive.

January 3, 2012

News

The Justice Department recently announced that Bruce Gregory Harrison III was convicted following a jury trial in federal court in Winston-Salem, N.C. Harrison had been charged in a 63-count indictment with large-scale payroll tax fraud and failure to file individual income tax returns. The evidence at trial proved that Harrison failed to pay over more than $15 million dollars in federal taxes withheld from the pay of his thousands of employees in the years 2004-2006 and 2009. According to the trial evidence and other documents filed in the case, Harrison did business under various corporate names including U.S.A. Staffing and Compensation Management Inc. He owned or controlled temporary staffing companies operating in at least nine states. Harrison's staffing companies contracted with client businesses to provide temporary workers. Harrison's companies promised to assume full responsibility for the payment of wages and the withholding and transmitting of taxes to the IRS for those employees. Instead, Harrison failed to account for and pay over in excess of $15 million in federal payroll taxes for the employees of those companies. The evidence at trial showed that Harrison caused false bank statements to be presented to auditors to conceal the nonpayment of the payroll taxes. Harrison was also convicted of corruptly endeavoring to obstruct the IRS by means of false statements to IRS revenue officers. Evidence established he had used company funds to purchase personal residences, to buy a yacht and to finance commercial motion pictures. Harrison was also convicted of failing to timely file his own income tax returns for 2004, 2005 and 2006. Following the jury verdict, Chief Judge James A. Beaty Jr. ordered Harrison detained.

Tip of the Day

Prospects for the new year? . . . For many small businesses things should be better than 2011, but don't expect substantial growth. A number of indicators are pointing up, but there's no question that the recovery is not yet on such solid footing that setbacks aren't possible. Employment should increase, but, again, not robustly. The housing market may improve, but prices are expected to decline further for at least the first quarter of 2012. The bottom line? Be ready to take advantage of an upturn, but don't approach the new year cautiously.