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December 13, 2013
The IRS has issued final regulations (T.D. 9549) relating to agents authorized by the Secretary under Section 3504 of the Code to perform acts required of employers who are home care service recipients. The final regulations affect employers and their designated agents who pay wages for home care services, which are subject to taxes under the Federal Unemployment Tax Act (FUTA). Prior to the amendments made by these final regulations, Sec. 31.3504-1 of the Employment Tax Regulations provided that the IRS may authorize an agent to undertake the employment tax obligations of an employer with respect to income tax withholding and Federal Insurance Contributions Act (FICA) taxes. However, the employer (the health care recipient) was required to continue to meet its employment tax obligations with respect to FUTA. Like the proposed regulations, these final regulations provide that the IRS may authorize an agent to undertake the employment tax obligations of an employer with respect to FUTA tax in certain circumstances.
Notice 2013-84 (IRB 2013-52) contains the 2013 Cumulative List of Changes in Plan Qualification Requirements (2013 Cumulative List) described in section 4 of Rev. Proc. 2007-44. The 2013 Cumulative List is to be used by plan sponsors and practitioners submitting determination letter applications for plans during the period beginning February 1, 2014 and ending January 31, 2015. Plans using this Cumulative List will primarily be single employer individually designed defined contribution plans and single employer individually designed defined benefit plans that are in Cycle D and multiemployer plans as described in Sec. 414(f). Generally an individually designed plan is in Cycle D if the last digit of the employer identification number of the plan sponsor is 4 or 9.
The IRS Tax-Exempt and Government Entities Division has provided interim administrative guidance (TEGE-07-1213-23) to the Exempt Organizations Determinations Unit (EOD) and Exempt Organizations Determinations Quality Assurance (EODQA) regarding processing and review guidelines for certain exemption applications under Section 501(c)(3). Specifically, these guidelines apply to applications for tax-exempt status under Section 501(c)(3) that indicate the organization may be involved in political campaign intervention for which additional development is necessary to determine qualification of exempt status. The following types of activities may suggest the potential for political campaign intervention:
The issues in Fincourt B. Shelton PC (T.C. Memo. 2013-273) were: (1) whether there was a valid offer-in-compromise; (2) whether a compromise should be imputed under the concept of accord and satisfaction; (3) whether equitable estoppel should be applied against respondent; and (4) whether the settlement officer abused her discretion in determining petitioner was not eligible for currently not collectible (CNC) status. The taxpayer argued that a $120,000 payment comprised all of its tax liabilities. The IRS disagreed. The Court noted the taxpayer failed to submit a Form 656 with the $120,000 payment and the IRS did not issue a written notice of acceptance. The Court found the IRS and the taxpayer did not enter into a valid offer-in-compromise.
Tip of the Day
Things change . . . Just because that service made sense when you had 10,000 feet of office space doesn't mean it's still the most cost effective when you're down to 4,500 feet because many of your employees are telecommuting. Or you need more services than the current vendor can provide because you now have offices in 6 states and triple the employees. There can be any number of reasons for changing service providers, vendors, equipment lessors, etc. It could be because the size of your firm, or the type of business it does has changed, or it could be because the provider has changed, increased prices, or isn't providing the quality you want. One of the problems here is that these changes tend to creep up, often unnoticed. A sudden, major change, such as an acquisition or dropping a product line, usually precipitates a review of office space, service providers, etc., but a slower change such as adding offices in a new state every year, often doesn't. Make sure you review service providers and other vendors at least annually.
December 12, 2013
Notice 2013-74 provides guidance on rollovers within a retirement plan to designated Roth accounts in the same plan (“in-plan Roth rollovers”). The guidance relates to the expansion of these rollovers under new Sec. 402A(c)(4)(E) of the Code, as added by Sec. 902 of the American Taxpayer Relief Act of 2012 (“ATRA”). This notice also provides guidance that applies to all in-plan Roth rollovers described in Sec. 402A(c)(4). Section III of the Notice provides guidance on in-plan Roth rollovers. This guidance is in addition to the guidance provided in Notice 2010-84. Part A addresses the applicability of Notice 2010-84 to in-plan Roth rollovers of otherwise nondistributable amounts. Part B provides additional guidance relating to in-plan Roth rollovers of otherwise nondistributable amounts. Part C provides guidance relating to all in-plan Roth rollovers.
Revenue Procedure 2013-39 (IRB 2013-52) describes and updates the procedure for requesting the IRS authorize a person to act as agent under Section 3504 of the Code and Reg. Sec. 31.3504-1 of the Employment Tax Regulations. Section 3504 of the Code authorizes the Secretary to promulgate regulations to authorize a fiduciary, agent, or other person (“agent”) who has the control of, receives, has custody of, disposes of, or pays the wages of an employee or group of employees, employed by one or more employers, to perform certain specified acts required of employers. Under Section 3504, all provisions of law (including penalties) applicable with respect to an employer are applicable to the agent and remain applicable to the employer. Accordingly, both the agent and employer are liable for the employment taxes and penalties associated with the employer’s employment tax obligations undertaken by the agent. Section 31.3504-1(b) as amended by T.D. 9649,effective December 12, 2013, permits an agent authorized for purposes of FICA tax and income tax withholding to perform acts required of an employer who is a home care service recipient to also be authorized for purposes of FUTA tax. Section 31.3504-1(b)(2) defines “home care services” to include health care and personal attendant care services rendered to the home care service recipient. Section 31.3504-1(b)(3) defines a “home care service recipient” as an individual who receives home care services while enrolled, and for the remainder of the calendar year after ceasing to be enrolled, in a program administered by a Federal, state, or local government agency that provides Federal, state, or local government funds to pay, in whole or in part, for home care services for that individual.
Tip of the Day
Recordkeeping . . . If you're an employee working for some big corporation, don't have a side business or a rental property, your recordkeeping is generally minimal. Save those canceled checks or images of your charitable contributions, real estate tax payments, etc. and you should be good. But if you have a business or a rental property, you should keep all your bank statements, records of deposits and loans, and similar documentation. There's a good chance the IRS will ask you about your personal finances, looking for unreported income. Talk to your tax advisor about your particular situation.
December 11, 2013
Just because you're on the accrual method doesn't mean you can always deduct an expense when you get the bill. In Vidal Suriel (141 T.C. No. 16) the taxpayer's wholly owned S corporation, Vibo was an accrual method taxpayer. Under the accrual method of accounting, taxpayers record liabilities as they are incurred. A taxpayer incurs a liability in the taxable year in which (1) all the events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect to the liability. Vibo claimed deductions for unpaid obligations, both principal and interest, owed into the Tobacco Master Settlement Agreement (MSA) fund, which is a qualified settlement fund under Sec. 468B. The IRS disallowed the deductions on the basis that economic performance did not occur until payment was actually made into the MSA fund, pursuant to Sec. 1.468B-3(c)(1), Income Tax Regs. Under Sec. 1366 the IRS made adjustments to the taxpayer's individual income tax returns and determined deficiencies in his income tax. The Court held that Vibo was not entitled to deductions for unpaid MSA obligations, because economic performance does not occur until the obligations are actually paid. The Court also held that because the special rules governing qualified settlement funds do not differentiate between interest and principal, we afford them equal treatment.
In Michael H. Dudek et ux. (T.C. Memo. 2013-272) the taxpayers entered into oil and gas lease agreements with EOG Resources, Inc. allowing the company to drill and extract oil and gas on their property. The agreement provided that the term may be extended for an additional five years for an extension payment of $2,500 per acre for a total of $883,250. The payment was not dependent on any extraction or production of oil or gas. The taxpayers received a 1099-MISC reporting the amount as miscellaneous income. The taxpayers reported the payment as a long-term capital gain on their return. To avoid ordinary income treatment for the bonus payment, the taxpayers argued that the Agreement was not a lease but was in substance a sale of their rights to any oil and gas on the property. The Court noted that where the owner of the land retains an economic interest in the deposits, the transaction is regarded as a lease and the proceeds are taxable as ordinary income. The Court held the royalty interest constitutes an economic interest because of the right to share in the proceeds of any oil and gas extracted. Thus, the transaction was regarded a lease. The Court held the $883,250 bonus payment was taxable as ordinary income, not capital gain.
Tip of the Day
Year-end equipment purchases . . . Last minute purchases can qualify for bonus depreciation or the Section 179 expense option. Two important points to keep in mind. To qualify for bonus depreciation the property was be new. That is, the first use of the property must begin with you. The rules are different for the Sec. 179 expense option. The equipment can be new or used. But the property must be acquired by purchase and it cannot be acquired from a related person or transferred between members of a controlled group.
December 10, 2013
The IRS has announced (Rev. Rul. 2013-25; IRB 2013-52) that interest rates will remain the same for the calendar quarter beginning Jan. 1, 2014. The rates will be:
Under the Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.
In Crescent Holdings LLC, Arthur W. Fields and Joleen H. Fields (141 T.C. No. 15) Holdings was a limited liability company formed on Sept. 7, 2006, and classified as a partnership for Federal income tax purposes. Resources was a limited liability company whose ownership was transferred to Holdings on Sept. 7, 2006. On Sept. 7, 2006, Resources entered into an employment agreement with Arthur Fields to have Holdings transfer a 2% interest in Holdings to Fields if he served as chief executive officer (CEO) of Resources for a period of three years ending on Sept. 7, 2009. The 2% interest was subject to a substantial risk of forfeiture and was not transferable. Holdings allocated partnership profits and losses attributable to the 2% interest to Fields for the taxable years 2006 and 2007 (years at issue). The Fields included these amounts in their gross income for the years at issue. Fields resigned as CEO and forfeited his right to the 2% interest before it vested. The issue was whether Fields or the other partners should recognize the undistributed partnership income allocations attributable to the 2% interest for the years at issue. The Court held the 2% interest is a partnership capital interest, not a partnership profits interest. Rev. Proc. 93-27, and Rev. Proc. 2001-43, are inapplicable because they apply only to partnership profits interests. The Court also held Sec. 83 applied to a nonvested partnership capital interest transferred in exchange for the performance of services and under Sec. 1.83-1(a)(1), the undistributed partnership income allocations attributable to the nonvested 2% partnership capital interest are to be recognized in the income of the transferor. Finally, the Court held Holdings was the transferor of the 2% partnership capital interest. The undistributed partnership allocations attributable to the 2% capital interest were allocable to the partners holding the remaining interest in Holdings.
Tip of the Day
Responsible for a tax-exempt veterans' organization? . . . In memorandum TEGE-04-1113-21 the IRS is revising examination guidelines for tax-exempt veterans' organizations described in Section 501(c)(19) of the Code by eliminating an agent's discretion to request DD Forms 214 at the outset of examinations for the purpose of determining whether the organization meets statutory membership requirements. Sections 501(c)(19) and 170(c)(3) provide statutory membership requirements for certain tax-exempt veterans' organizations. Compliance with these requirements has a direct effect on the qualification for tax-exempt status and the deductibility of contributions. In order to confirm whether a veterans' organization meets statutory membership requirements, IRM 126.96.36.199(1) provides that examining agents may request, among other documents, DD Forms 214, Certificate of Release or Discharge from Active Duty, of veterans' organizations. DD Form 214 is a military service discharge certificate issued to veterans, providing proof of military service. However, DD Form 214 also contains private information, such as medical information. Effective immediately, if an agent needs to determine the composition of membership of a veterans' organization, the agent shall initially request and collect from the organization four sets of documents--membership lists showing names and military service dates, a document showing the dues structure and classes of membership, information used to create the membership list, and documents related to the organization's policies and procedures on deciding on membership.
December 9, 2013
The IRS has issued (Notice 2013-80; IRB 2014-52) the standard mileage rates for business, charitable, medical or moving expense deduction purposes in 2014. The rate for business use will be 56 cents per mile (down from 56.5); for medical and moving purposes it will be 23.5 cents (down from 24). For charitable purposes the rate is 14 cents per mile, as provided by statute. The deemed depreciation per mile for taxpayers using the standard mileage rate will be 22 cents per mile (down from 23). For purposes of the allowance under a FAVR plan, the standard automobile cost may not exceed $28,200 and that for trucks and vans $30,400.
The Treasury Inspector General for Tax Administration (TIGTA) found that perpetrators of fraud are using stolen or falsely obtained EINs to submit tax returns with false income and withholding documents to the IRS for the sole purpose of receiving a fraudulent tax refund. The overall objective of this review was to assess the IRS's process for issuing EINs and its process to identify stolen or falsely obtained EINs used to report income and withholding. TIGTA identified 767,071 Tax Year 2011 electronically filed individual tax returns with refunds based on falsely reported income and withholding that used 277,624 stolen EINs used to report false income and withholding on 752,656 returns with potentially fraudulent refunds issued totaling more than $2.2 billion and 8,046 were falsely obtained EINs used to report false income and withholding on 14,415 tax returns with potentially fraudulent refunds totaling more than $50 million.
The IRS has issued proposed regulations (REG-126285-12) concerning the deductibility of start-up expenditures and organizational expenses for partnerships. The proposed regulations provide guidance regarding the deductibility of start-up expenditures and organizational expenses for partnerships following a technical termination of a partnership. The IRS is aware that some taxpayers are taking the position that a technical termination under Section 708(b)(1)(B) entitles a partnership to deduct unamortized start-up expenses and organizational expenses to the extent provided under Section 165. The IRS believes this result is contrary to the congressional intent underlying Sections 195, 708, and 709. Therefore, the proposed regulations amend Sec. 1.708-1 to provide that a new partnership formed due to a transaction, or series of transactions, described in Section 708(b)(1)(B) must continue amortizing the Section 195 and Section 709 expenses using the same amortization period adopted by the terminating partnership.
Tip of the Day
Doing business through multiple entities . . . It's not unusual for business owners to use several entities--partnerships, LLCs, S corporations and even regular corporations. It's also not unusual for the entities to have intercompany transactions. Madison Inc. performs management functions for Chatham LLC which rents property to Waterford Inc. You should be careful that the transactions are handled on an arms' length basis. And, if some of the entities have losses while others have profits, you should watch your basis carefully. You generally don't want to be in the position where one or more entities generates a loss that can't be used because you have insufficient basis. Other items to consider are intercompany loans, rental income, and intercompany transactions. Discuss the issues with your tax adviser.
December 6, 2013
The IRS has recently released publications updated for 2013 tax returns including:
In Gary L. Fish et ux (T.C. Memo. 2013-270) the issue was whether income received by the taxpayer husband's S corporation in a Section 351 transaction (contribution of property to a corporation in return for stock) with its subsidiary should be reclassified as ordinary income under Section 1239. Section 1239 treats gain from the sale of depreciable property between related taxpayers as ordinary income rather than as capital gain. Thus, the resolution of the issue depended upon whether the taxpayer husband's S corporation and its subsidiary were related persons for purposes of Section 1239. In this case the property in question was a Section 197 intangible. The Court noted that an amortizable Section 197 intangible is Section 1245 property. Thus, the gain from the sale or exchange of property between related taxpayers is subject to the antiabuse provisions of Sec. 1239 if the property is an amortizable Sec. 197 intangible. The Court also found that Sec. 1239 defines related persons as a person and all entities which are controlled entities with respect to such person. The Court noted a 50% ownership rule applied and looked at voting rights and valuation of both the common and preferred stock of the corporation. The Court held the gain received on the transaction was ordinary income.
Sending something to the IRS or Tax Court? It's considered filed on the day you mail it, but only if you use the U.S. Postal Service or a designated delivery service. In Robert J. Eichelburg (T.C. Memo. 2013-269) the taxpayer mailed his petition to the Tax Court using FedEx Express Saver. While the petition could have been mailed using FedEx, the only allowed services are Priority Overnight, Standard Overnight, 2 Day, International Priority and International First. Since the petition wasn't mailed using one of these services, it was considered received on the day it was actually received and, that was past the deadline. Check the rules before using other than USPS. See Notice 2004-83.
Tip of the Day
Partnership and S corporation charitable contributions of property . . . A partnership or S corporation that makes a contribution of noncash gifts of more than $500 must file Form 8283 with Form 1065, 1065-B or 1120S. If the total deduction for any item or group of similar items is more than $5,000, the partnership or S corporation must complete Section B of From 8283 even if the amount allocated to each partner or shareholder is $5,000 or less. The partnership or S corporation must give a copy of Form 8283 to each partner or shareholder receiving an allocation of the contribution. The partner or shareholder must attach a copy of Form 8283 to his or her tax return. If the contribution is $500 or less and the partnership or S corporation, combine the amount shown on the K-1 with your other noncash contributions to determine if you must file Form 8283.
December 5, 2013
House Ways and Means Committee Chair Dave Camp, R-Mich. has told reporters that no tax bill will be introduced this year. Camp said there just isn't any time left this year to mark up a tax reform bill. Camp also said the tax provisions expiring at the end of this year will not be extended at this time. (Selected provisions may be extended retroactively through an extenders bill next year or through tax reform legislation.)
The IRS is starting this year’s EITC due diligence compliance audits of return preparers. The audits highlight the need to file accurate claims for EITC and other refundable credits. The IRS visits include a review of EITC claims for compliance with Internal Revenue Code Section 6695(g). Requirements include:
Non-compliant return preparers face penalties of $500 per return and other consequences. Additionally, IRS auditors will conduct a review of the return preparer’s tax identification number or PTIN registration status and personal federal tax filing requirements. Visit EITC Central and review the preparer EITC due diligence training resources to learn more about preventing EITC errors.
The IRS has released Publication 17, Your Federal Income Tax for preparing 2013 tax returns.
In William B. Meyer (T.C. Memo. 2013-268) the IRS figured out how much the taxpayer owed and wanted to collect by levying on his property. The taxpayer got a collection due process (CDP) hearing, but the Appeals officer upheld the decision to levy. The taxpayer argued that the Appeals officer abused his discretion by not properly verifying that the IRS followed applicable law or administrative procedure. The taxpayer claimed the IRS either never created a notice of deficiency or never mailed it. The Tax Court remanded the issue to the Appeals Office to clarify the record as to whether a notice of deficiency was both properly issued and mailed to the taxpayer in light of intervening caselaw.
Tip of the Day
Record ownership . . . Selling your business? Liquidating? If you're audited down the road you may need access to those records. It's common to provide records to the new owner, but make sure you either keep a copy or include language in the contract allowing you access to them for the appropriate period of time. There's no reason you shouldn't be able to retain a copy of any electronic data, e.g., your accounting files. Talk to your accountant and attorney.
December 4, 2013
In a unanimous decision, the U.S. Supreme Court has held that a District Court had jurisdiction to determine whether the partnerships' lack of economic substance could justify imposing a valuation-misstatement penalty on the partners. The Court noted under TEFRA's framework, a court in a partnership-level proceeding has jurisdiction to determine "the applicability of any penalty . . . which relates to an adjustment to a partnership item." A determination that a partnership lacks economic substance is such an adjustment. TEFRA authorizes courts in partnership-level proceedings to provisionally determine the applicability of any penalty that could result from an adjustment to a partnership item, even though imposing the penalty requires a subsequent, partner-level proceeding. The Court held the plain language of the valuation misstatement penalty was applicable in this case. Once the partnerships were deemed not to exist for tax purposes, no partner could legitimately claim a basis in his partnership interest greater than zero. United States v. Woods, U.S. Supreme Court.
The Affordable Care Act (ACA) law seeks to provide more Americans with access to affordable health care. The Premium Tax Credit (PTC) Project falls under the IRS ACA Program. Beginning January 2014, eligible taxpayers who purchase health insurance through an Exchange may qualify for and request a refundable tax credit (the PTC) to assist with paying their health insurance premium. The credit is claimed on the taxpayer’s Federal tax return at the end of each coverage year. Because it is a refundable credit, taxpayers who have little or no income tax liability can still benefit. The PTC can also be paid in advance to a taxpayer’s health insurance provider to help cover the cost of premiums. This credit is referred to as the Advanced Premium Tax Credit (APTC). The Treasury Inspector General for Tax Administration performed an audit to determine if the IRS is adequately managing systems development risks for the PTC Project. TIGTA evaluated the IRS’s key management controls and processes for risk management, requirements and change management, testing, security, and fraud detection for the PTC Project, which is being developed in the IRS’s new Enterprise Life Cycle Iterative Path. TIGTA found that the IRS has completed development and testing for the PTC Computation Engine (PTC-CE) needed to calculate the APTC and the Remainder Benchmark Household Contribution. In addition, the IRS developed a process to verify the accuracy of the PTC-CE calculations. However, improvements are needed to ensure the long-term success of the PTC Project by adherence to systems development controls for: (1) configuration and change management; (2) interagency test management process; (3) security; and (4) fraud detection and mitigation, in accordance with applicable guidance.
Tip of the Day
One client independent contractor? . . . Can you be an independent contractor if you have only one client or customer? Yes, but it may be a flag if you're audited and the IRS inquires of your customer base. And that factor will go against you. However, if the other factors are in your favor, you shouldn't have a problem.
December 3, 2013
The Treasury announced that the U.S. has signed intergovernmental agreements (IGAs) with the Cayman Islands and Costa Rica to implement the Foreign Account Tax Compliance Act (FATCA). FATCA is rapidly becoming the global model for combating offshore tax evasion and promoting transparency. FATCA, enacted in 2010, seeks to obtain information on accounts held by U.S. taxpayers in other countries. It requires U.S. financial institutions to withhold a portion of payments made to foreign financial institutions (FFIs) that do not agree to identify and report information on U.S. account holders. FFIs have the option of entering into agreements directly with the IRS, or through one of two alternative Model IGAs signed by their home country. Signed on November 29, the Cayman Islands IGA is a Model 1B agreement, meaning that FFIs in the Cayman Islands will be required to report tax information about U.S. account holders directly to the Cayman Islands Tax Information Authority, which is the sole channel in the Cayman Islands for the provision of tax-related information to other governments. The Cayman Islands Tax Information Authority will in turn relay that information to the IRS. Additionally, the United States and the Cayman Islands also signed a new Tax Information Exchange Agreement (TIEA). The Costa Rica IGA was signed on November 26 and is a Model 1A agreement, meaning that the U.S. will also provide tax information to the Costa Rican government regarding Costa Rican individuals with accounts in the U.S.
Tip of the Day
Dues may not be fully deductible . . . Dues to a professional organization are generally deductible on your business tax return or as a miscellaneous itemized deduction on your personal return. But many organizations engage in lobbying and the portion of your dues expended for such purposes are not deductible. The nondeductible amount can vary from very minor to a significant dollar amount depending on the organization. It should be spelled out on your dues statement.
December 2, 2013
The IRS has issued final regulations (T.D. 9647) that provide user fees charged for processing installment agreements and offers in compromise. The final regulations affect taxpayers who wish to pay their federal tax liabilities through installment agreements and offers in compromise. Effective December 2, 2013, the fee for entering into an installment agreement increases from $105 to $120; for restructuring or reinstating an agreement from $45 to $50; the fee for a direct debit installment agreement remains at $52; the fee for any installment agreement for low-income taxpayers remains at $43. The fee for processing an offer in compromise increases from $150 to $186.
Section 3402(p) allows for voluntary income tax withholding agreements. Section 3402(p)(3) authorizes the IRS to provide regulations for withholding from (A) remuneration for services performed by an employee for the employee's employer which does not constitute wages, and (B) from any other payment with respect to which the IRS finds that withholding would be appropriate, if the employer and employee, or other parties, agree to such withholding. Section 3402(p)(3) also authorizes the IRS to prescribe in regulations the form and manner of such agreement. Section 31.3402(p)-1 of the Employment Tax Regulations describes how an employer and an employee may enter into an income tax withholding agreement under Section 3402(p) for amounts that are excepted from the definition of wages in Section 3401(a). The IRS has issued temporary (T.D. 9646) and proposed (REG-146620-13) regulations relating to voluntary withholding agreements. The regulations allow the Secretary to issue guidance in the Internal Revenue Bulletin to describe payments for which the Secretary finds that income tax withholding under a voluntary withholding agreement would be appropriate. In the explanation of the provisions the IRS said expanding the use of voluntary withholding agreements to payments designated by the Secretary as eligible for voluntary withholding will permit taxpayers to use the withholding regime (rather than the estimated tax payment process) to meet their tax payment obligations on a timely basis, minimize the risk of underpayment of taxes, and achieve administrative simplification for taxpayers and the IRS.
Tip of the Day
S corporation losses deferred to bad planning . . . S corporation (or partnership) losses are usually disallowed for one of two reasons--lack of sufficient basis or failure to materially participate in the activity. In one father-son business the taxpayers managed to create the worst of all worlds. They did business through four S corporations (all in the same industry, three owned substantially by the father and one owned only by the son. The son contributed a minimal amount of equity capital. The father had no equity interest but loaned the corporation substantial sums. The three corporations owned by the father were profitable; the one owned by the son was not. But the son couldn't take the losses because he had no basis and the father couldn't take the losses because he had no equity interest (and he didn't materially participate). The losses were lost, but only deferred. Nonetheless, they could have been used to advantage.
November 29, 2013
The IRS enterprise portal will be unavailable beginning Saturday, Dec. 7 from approximately 7:00 a.m., Eastern Time until Sunday, Dec. 8 at 7:00 a.m. for routine maintenance. This outage will affect various enterprise applications such as e-file and e-Services. The IRS asks that all users refrain from submitting returns and other electronic products during this period. A second outage is planned for Saturday, Dec. 21 from 7:00 a.m., Eastern until Sunday, Dec. 22 at 7:00 a.m., also for routine maintenance.
Victims of severe storms, straight-line winds and tornadoes that began on Nov. 17, 2013 in parts of Illinois may qualify for tax relief from the IRS. Following recent disaster declarations for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Illinois will receive tax relief, and other locations may be added in coming days based on additional damage assessments by FEMA. The President has declared the counties of Champaign, Douglas, Fayette, Grundy, Jasper, La Salle, Massac, Pope, Tazewell, Vermilion, Wabash, Washington, Wayne, Will and Woodford a federal disaster area. Individuals who reside or have a business in these counties may qualify for tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Nov. 17, and on or before Feb. 28, 2014, have been postponed to Feb. 28, 2014. The IRS is also waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after Nov. 17, and on or before Dec. 2, as long as the deposits are made by Dec. 2, 2013.
On its Federal income tax return for the taxable year ending (TYE) Mar. 31, 2005, VECO Corp. and subsidiaries (141 T.C. No. 14), an accrual method taxpayer, implemented a proposed change in accounting method and in so doing accelerated deductions for parts of certain liabilities attributable to periods after the close of its taxable year 2005. The IRS rejected the taxpayer's proposed change in accounting method and denied its claimed accelerated deductions. The taxpayer claimed that it was entitled to accelerate the deductions under the "all events" test of Sec. 461 and/or the recurring item exception to the economic performance rules of Sec. 461(h)(3). For financial statement purposes the taxpayer accrued the liabilities over more than one taxable year. The taxpayer treated the liabilities inconsistently for financial statement and tax purposes. The Tax Court held that because neither the required performances nor the payment due dates with respect to the majority of the accelerated deductions occurred before the close of the taxpayer's TYE 2005, it failed to satisfy the first requirement of the all events test of Sec. 461; i.e., the taxpayer failed to prove that all of the events had occurred to establish the fact of the liabilities under Sec. 1.461-1(a)(2)(i) of the regulations. The Court further held that with respect to the remaining accelerated deductions, the taxpayer did not satisfy all of the requirements for the recurring item exception under Sec. 461(h)(3) and, consequently, was not excepted from the general rule of Sec. 461(h)(1) requiring economic performance, because the liabilities underlying the deductions were prorated over more than one taxable year, were treated inconsistently for financial statement and tax purposes, and were material items for tax purposes within the meaning of Sec. 461(h)(3)(A)(iv)(I).
Tip of the Day
Customer service isn't about numbers . . . Most companies just want to get through as many customer calls per representative per hour as possible. That's probably not the best measure of customer satisfaction. Do a survey of customers. Are they satisfied with the rep's response. If customers aren't satisfied at least a portion will take their business elsewhere. Replacing those customers is almost assuredly more expensive than giving them a good customer service experience.
November 27, 2013
The IRS has issued final regulations (T.D. 9644) under Section 1411. These regulations provide guidance on the general application of the Net Investment Income Tax and the computation of Net Investment Income (the 3.8% tax on interest, dividends, rents, etc. for taxpayers with modified AGI in excess of $200,000 ($250,000 married, joint). The regulations affect individuals, estates, and trusts whose incomes meet certain income thresholds.
The IRS has issued final regulations (T.D. 9645) relating to the Additional Hospital Insurance Tax on income above threshold amounts ("Additional Medicare Tax") as added by the Affordable Care Act. These final regulations provide guidance to employers and individuals relating to the implementation of the tax, including the requirement to withhold Additional Medicare Tax on certain wages and compensation, the requirement to file a return reporting the tax, the employer process for adjusting underpayments and overpayments of the tax and the employer and the employer and individual processes for filing a claim for refund for an overpayment of the tax.
The IRS has issued proposed regulations (REG-134417-13) that provide guidance to tax-exempt social welfare organizations on political activities related to candidates that will not be considered to promote social welfare. These regulation will affect tax-exempt social welfare organizations and organizations seeking such status.
How do you define gross receipts? It's not just your net income that can be important. In City Line Candy & Tobacco Corp. (141 T.C. No. 13) the taxpayer was a corporation, and a reseller and licensed wholesale dealer of cigarettes in New York. New York law provides that all cigarettes possessed for sale must bear a stamp issued by the New York tax commissioner. Pursuant to this law, the taxpayer, a licensed cigarette stamping agent for New York, purchased cigarette packs for sale, purchased and affixed cigarette tax stamps to those cigarette packs, and sold the stamped cigarette packs to subjobbers and retailers in New York City and throughout New York State. Under New York law, the taxpayer was required to include, and did include, the cost of the cigarette tax stamps in the sale price of the cigarettes. The taxpayer used the accrual method of accounting and a fiscal year ending Oct. 31. For all relevant years it computed its gross receipts from cigarette sales for financial statement purposes by totaling the gross sale prices of the cigarettes sold during each year. However, for income tax reporting purposes it adjusted its gross receipts from cigarette sales by subtracting the approximate cost of cigarette tax stamps purchased during the fiscal year and reporting as its gross receipts the resulting net amount. The taxpayer argued that its average annual gross receipts (determined for income tax reporting purposes) for the three-taxable-year period ending with the taxable year preceding each of the years in issue did not exceed $10 million. It contended that it qualified for the small reseller exception under Sec. 263A(b)(2)(B) for each of the years in issue and consequently was not required to comply with the uniform capitalization (UNICAP) rules of Sec. 263A with respect to the cigarettes acquired for resale. The Court held the IRS correctly determined the taxpayer's gross receipts for each of the years in issue on the basis of the entire sale price of the cigarettes it sold, including that part of the sale price attributable to the cost of the cigarette tax stamps. The Court also held the taxpayer was subject to the UNICAP rules of Sec. 263A because it failed to prove that its average annual gross receipts did not exceed $10 million for any of the years in issue. The Court further held that the cigarette tax stamp costs are indirect costs that must be capitalized under the UNICAP rules and the cigarette tax stamp costs are handling costs that the IRS properly allocated, in part, to the taxpayer's ending inventory using the simplified resale method.
Tip of the Day
Participating in a trade show? . . . Check the rules in the state where the show is being held. In an advisory opinion one state held that a company's participation at two 5- day trade shows was de minimus, that is too small a connection to subject it to the state's income tax. The corporation did not make any sales or take orders at the show. It merely displayed and demonstrated its products. If you limit your activities to simply demonstrating your products, you should be safe. Once you start taking orders or actually making sales, you'll have to check the laws for that state. There's a good chance you'll not only be subject to sales tax but to income taxes as well.
November 26, 2013
In Estate of Diane Tanenblatt et al. (T.C. Memo. 2013-263) the IRS increased the value of an interest in an LLC that was included in the value of the estate. The parties stipulated copies of the pleadings. In the petition, the taxpayer avered that he obtained a new appraisal, "a copy of which" was attached to the petition. The IRS only admitted that a new appraisal was attached to the petition. The taxpayer argued that the appraisal was admitted in evidence by stipulation and must be considered by the court as expert testimony notwithstanding the taxpayer's failure to qualify the author of the appraisal as an expert pursuant to Fed. R. Evid. 702 or to satisfy Rule 143(g), Tax Court Rules of Practice and Procedure, addressing expert witness reports, and the provisions of the Court's standing pretrial order addressing expert testimony. The Tax Court excluded the appraisal from evidence for failure of the taxpayer to satisfy the preconditions to the Court receiving expert testimony.
In Larry F. Anderson (T.C. Memo. 2013-261) the taxpayer was convicted of tax crimes, including Sec. 7201 tax evasion with respect to his 1991 tax year. The IRS assessed an Sec. 6663(a) civil fraud penalty of $23,104 for the 1991 tax year in August 2008. The IRS issued notice and demand for payment of the $23,104 penalty plus interest of $53,385. The taxpayer offered to compromise this liability, because of doubt as to collectibility as well as effective tax administration, but the IRS rejected the offer and filed a notice of Federal tax lien (NFTL). The taxpayer then timely requested a collection due process hearing to review the rejection of his offer-in-compromise and the filing of the NFTL. Appeals rejected the offer-in-compromise and sustained the filing of the NFTL. The Court noted the IRS may accept an offer based on doubt as to collectibility that is less than the reasonable collection potential if special circumstances are present. The regulations also discuss two scenarios under which the promotion of effective tax administration can be grounds for compromise: (1) if full collection "would cause the taxpayer economic hardship," and (2) if there are "compelling public policy or equity considerations" alleges that Appeals failed to properly consider his medical history in rejecting the offers. The case history indicates that Appeals requested doctor's notes regarding the taxpayer's health and that he was requesting "consideration of the special circumstances surrounding his deteriorating health and advanced age". The Court noted the last offer by the taxpayer was rejected because, according to the officer's notes, the taxpayer "has not shown that health issues are severe or terminal". The Court struggled to reconcile this statement with the physician's diagnosis that the taxpayer's prostate cancer has spread to his bones. The Court held the administrative record was insufficient to determine whether Appeals appropriately considered the taxpayer's health in the determination of his offer in compromise and remanded the case to clarify and supplement the record.
Tip of the Day
Nontaxable workmen's compensation or taxable pension? . . . If you receive workmen's compensation for a job related injury, the benefits are not taxable. On the other hand, pensions received are fully taxable. The distinction is usually, but not always, clear. In some cases the lines blur. For example, if your disability payments are based on age or length of service. And the rule for workmen's compensation does not apply to amounts received as compensation for a non-occupational injury or sickness nor to amounts received as compensation for an occupational injury to the extent that they are in excess of the amount provided in the applicable workmen's compensation acts. If benefits are computed by a formula that does not refer to the employee's age, length of service or prior contributions and are provided to a class that is restricted to employees with service-incurred injuries, sickness or death, then the statute under which the benefits are paid qualifies as a statute in the nature of a workmen's compensation act.
November 25, 2013
In Notice 2013-72 (IRB 2013-48) the IRS announced the minimum amount a domestic worker must earn so that such earnings are covered under Social Security or Medicare for 2014 is $1,900. Earlier this month the IRS announced the contribution and benefit base for remuneration paid (and for self-employment income) in 2014 will be $117,000. The current notice announced the "old law" contribution and benefit base for Social Security for 2014 is $87,000.
Rev. Rul 2013-23 (IRB 2013-48) contains the original issue discount amounts for 2014 under Sec. 1274A. The amount under Sec. 1274A(b) for qualified debt instruments for 2014 is $5,557,200. The amount under Sec. 1274A(c)(2)(A) for a cash method debt instrument is $3,969,500.
In Yitzchok D. Rand et ux. (141 T.C. No. 12) the taxpayers filed a joint income tax return for 2008 improperly claiming three refundable credits: an earned income credit, an additional child tax credit, and a recovery rebate credit. As a result, they claimed a tax refund of $7,327. The parties agree that the correct tax liability was $144. The parties also agree that an accuracy-related penalty applies, but they dispute how the penalty should be calculated, specifically what should be used as the amount shown as the tax on the return. This number affects the amount of the underpayment that serves as the base upon which an accuracy-related penalty is computed. The Tax Court held that when determining the amount shown as tax on the return under Sec. 6664(a)(1)(A), the earned income credit, additional child tax credit, and recovery rebate credit are taken into account but do not reduce the amount shown as tax below zero.
Tip of the Day
Don't try to sell the same customer twice . . . One company just signed up for a new internet service. They were waiting for the installation. In the meantime, they were solicited three times in less than two weeks, asking if they wanted the service. It would be funny if it wasn't sad. There's got to be a significant number of potential or new customers wondering if sloppy marketing is going to be a reflection of sloppy service. While some customers won't care how your business gets there, for many there's more to service than just the final product. Everyone from the receptionist who takes the call to the last contact with the customer reflects on your business. Make sure you're marketing isn't making you look foolish.
November 22, 2013
House Ways and Means Committee Chair Dave Camp, R-Mich. has indicated that he has no plans to pursue changes to the estate and gift tax laws in any tax reform package.
Senate Finance Committee Chair Max Baucus, D-Mont. has introduced a discussion draft that would change the depreciation system using a longer recovery period, increase Sec. 179 expensing to $1 million, eliminate LIFO inventory accounting, and allow more businesses to use the cash accounting method. The draft also suggest eliminating like-kind exchanges and percentage depletion. The full text of the draft is at The Joint Committee on Taxation-JCX-19-13.
In Bradley C. Reifler et ux. (T.C. Memo. 2013-258) the taxpayers filed their on or about the extended due date. Their joint Federal income tax return for 2000 was received by the IRS, but signed under penalties of perjury by the husband, but not by the wife. Upon receipt, the service center date-stamped the return, made handwritten markings indicating a missing signature, and mailed the return back to the taxpayers with a form requesting that the wife sign it and that the taxpayers return it to the service center within 20 days. They did not mail back the 2000 return with the wife's signature as requested. On July 29, 2002, the IRS issued a "Taxpayer Delinquency Notice" to the taxpayers. In response, the taxpayers submitted a second joint Federal income tax return for 2000. The second 2000 return was identical to the first except that it was signed by both the taxpayers opposite a date of Aug. 25, 2002, and bore neither the Oct. 15, 2001, date stamp nor the service center's markings on the original return. It was received by the service center on Sept. 2, 2002. Beginning on July 1, 2005, the IRS obtained from the taxpayers a series of consents extending the period of limitations on assessment and collection for 2000 until June 30, 2010, a date after the May 17, 2010, issuance of the notice of deficiency covering the taxpayers' 2000 tax year. The taxpayers alleged that those consents were invalid because the Sec. 6501(a) period of limitations on assessment and collection with respect to the taxpayers' 2000 Federal income tax expired on Oct. 15, 2004, three years after they filed the initial 2000 return. The Court held the taxpayers were estopped from raising the affirmative defense of the period of limitations with regard to any 2000 deficiencies; 2000 remains open for assessment and collection of Federal income tax. The return they filed on the extended due date was not a valid return because it was not signed by both spouses. The first valid return was the one dated August 25, 2002.
Tip of the Day
Looking for business capital? . . . You're proud that you started the business in your garage and now do $12 million in sales between one brick and mortar location and the Web. Not only that, you've got margins to die for. But you're still in charge of virtually everything. You make all the purchasing as well as financial and marketing decisions. You're looking for capital to expand the number of locations and your Web presence. While you might think you're a prime candidate for an attractive offer, you're probably not. Why? Everything hinges on your presence. You've got no backup. The good news is the problem can probably be remedied. But it could take some time. Another point. The business would probably not be easy to sell--for the same reason.
Copyright 2013 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. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536