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June 29, 2016
While most of your debts can be discharged in bankruptcy, there are at least two that can't be. One is any liability for Federal trust fund taxes (e.g., withheld taxes) and trust fund recovery penalties. In addition, other federal taxes incurred within three years of declaring bankruptcy are not dischargeable. That's what the District Court held in Dental Care Associates of Spokane Valley, PS, Dr. James G. Hood, DDS, and Karen J. Hood (U.S. District Court, E.D. Washington).
A reportable transaction is one of any number of types of transactions that are likely to be used for tax avoidance. They are supposed to be disclosed on the individual's or businesses' tax return and by any material advisor. Such transactions include ones where the assets of a corporation are sold following the purported sale of the corporation's stock to an intermediary and that these and substantially similar transactions are designated "listed transactions" (Notice 2001-16). In Estate of Richard L. Marshall, Deceased, Patsy L. Marshall, Personal Representative, and Patsy L. Marshall, Transferees, et al. (T.C. Memo. 2016-119) the shareholders wanted to cash out of a C corporation whose assets consisted largely of cash. Since the entity was a C corporation there would be a large tax price to pay if the entity was liquidated. The shareholders decided to enter into a transaction with an intermediary to avoid reduce this liability. The Court examined the transaction and found it had no economic effects other than the creation of a loss. The Court found the taxpayers liable as transferees for the corporation's unpaid Federal tax liability.
Tip of the Day
Cash transactions . . . Banks, financial institutions, and other businesses have to report to the IRS the receipt or withdrawal of cash if the amount is over $10,000. "Structuring" involves the illegal splitting up of cash deposits or withdrawals into smaller amounts in order to avoid a bank's discovery of large cash transactions. The Bank Secrecy Act requires that banks report cash deposits or withdrawals of over $10,000 to the IRS. "Structuring" is also a method employed by those attempting to evade taxes or hide income from the IRS. This is not like an IRS penalty. The monetary penalties can be substantial and jail time is not unheard of.
June 28, 2016
Victims of the severe storms, flooding, landslides, and mudslides that took place beginning on June 22, 2016 in parts of West Virginia may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of West Virginia. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced that affected taxpayers in West Virginia will receive tax relief. Individuals who reside or have a business in Greenbrier, Kanawha and Nicholas 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 June 22, and on or before November 15, 2016 have been postponed to November 15, 2016. This includes individual returns on extension to October 17, the September 15 deadline for making quarterly estimated tax payments, the 2015 corporate and partnership returns on extension through September 15, and the August 1 deadlines for quarterly payroll and excise tax returns. In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise tax deposits due on or after June 22 as long as the deposits were made by July 7, 2016. If an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date that falls within the postponement period, the taxpayer should call the telephone number on the notice to have the IRS abate the penalty. The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 866-562-5227 to request this tax relief.
Section 274(h)(1) disallows deductions under Section 162 (business expenses) for expenses allocable to attendance of an individual at a convention, seminar, or similar meeting held outside the North American area unless the taxpayer demonstrates that the meeting is directly related to the active conduct of his or her trade or business and the location of the convention satisfies specified standards of reasonableness. Rev. Rul. 2016 -16 (IRB 2016-16) updates the definition of the North American area.
The Electronic Tax Administration Advisory Committee (ETAAC) was formed and authorized under the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98). ETAAC's primary charter is to provide input to the Internal Revenue Service (IRS) on the development and implementation of the IRS strategic plan for electronic tax administration. The ETAAC has just released its Annual Report to Congress (IRS Publication 3415).
Tip of the Day
Got a pool? . . . A dog? You might want to check the liability portion of your homeowner's policy. A new pool can be a good reason to up your coverage. A new dog could also be an issue. Rent out some stalls in your barn? Another reason to check. You don't want to have an accident and find out you're not or inadequately covered. In some cases the insurance company may want to inspect the pool or other property improvement. You may get a lower rate if you take certain precautions such as a fence, alarm, etc. for the pool (which may be required by town code).
June 27, 2016
The House has released a proposal for changes in the tax law. Some of the proposals include a cut in the corporate tax rate to 20%; three rates for individuals--12%, 25%, and 33%; and lowered rates on capital gains and dividends. Business income from S corporations, partnerships, or LLCs would be taxed at no more than 25%. Many deductions and credits would be eliminated as well as the alternative minimum tax (AMT). The IRS would be reduced in size and most individuals would be able to file on a postcard. While that's the general approach, it's far to early to speculate on the eventual outcome--which, of course, will depend on the upcoming elections.
The IRS has updated the disaster notice for Texas. Victims of the severe storms and flooding that took place beginning on May 26, 2016 in parts of Texas may qualify for tax relief from the IRS. The complete list now includes the counties of Austin, Bastrop, Brazoria, Brazos, Burleson, Eastland, Fort Bend, Grimes, Hidalgo, Hood, Lee, Liberty, Montgomery, San Jacinto, Stephens, Travis, Tyler, Waller and Washington.
The IRS has announced that as a precautionary step to protect taxpayers, that the electronic filing PIN tool is no longer available on IRS.gov or by toll-free phone following additional questionable activity.
Tip of the Day
Brexit vote . . . For most businesses and investors Britain's exit from the EU is not good news, but it's far from the financial crisis of 2008. That trip to Britain will cost you less; but we'll probably see less Brits visiting the U.S. The stock market plunged on Friday, but part of the reason was the unexpected outcome of the vote. It's likely at least the U.S. market will stabilize quickly. If it doesn't, it'll most likely be due to other factors. If you're in the market for the mid to long term--and that's the way you should look at stocks--this is not something to be worried about. That doesn't mean you shouldn't talk to your financial advisor about the risk to your portfolio if you hold individual stocks or have significant holdings in certain international funds. Some rebalancing may be appropriate. While this may hold down certain segments of the U.S. economy, there should be no significant effects. And offsetting any drag is that any near-term increase in interest rates by the Fed just got less likely.
June 24, 2016
The United States generally taxes its citizens and resident aliens on their worldwide income. Some taxpayers use offshore bank/financial accounts to hide assets and income outside the United States in an effort to evade their Federal tax obligations. Taxpayers who intentionally fail to report income earned on offshore accounts or who neglect to disclose foreign assets as required by law face significant penalties and possible criminal prosecution if discovered by the IRS. While giving noncompliant taxpayers the opportunity to resolve their potential tax delinquencies through the Offshore Voluntary Disclosure Program (OVDP), it is important for the IRS to ensure that these taxpayers actually become compliant with their tax obligations. The Treasury Inspector General for Tax Administration (TIGTA) performed an audit to assess how well the IRS is managing the OVDP and its efforts to improve taxpayer compliance and hold taxpayers who fail to report their offshore financial activities on their tax returns and Reports of Foreign Bank and Financial Accounts (FBAR) accountable. TIGTA found the IRS needs to improve its efforts to address the noncompliance of taxpayers who are denied access to or withdraw from the OVDP. TIGTA reviewed a stratified random sample of 100 taxpayers from a population of 3,182 OVDP requests that were either denied or withdrawn from the OVDP. Although 29 of these 100 taxpayers should have been potentially subject to FBAR penalties, the IRS did not initiate any compliance actions. Projecting the sample results to the population of denied or withdrawn requests, the IRS did not assess approximately $21.6 million in delinquent FBAR penalties. TIGTA also identified internal control weaknesses that led to delayed or incorrect processing of OVDP requests through poor communication among IRS functions involved in the OVDP. TIGTA recommended that the IRS: 1) review all denied or withdrawn offshore voluntary disclosure requests identified in this report for potential FBAR penalty assessments and criminal investigation; 2) develop procedures for reviewing denied and withdrawn cases for further compliance actions; 3) centrally track and control OVDP requests; 4) establish one mailing address for taxpayer correspondence; 5) ensure that employees adhere to timeliness guidelines throughout the entire OVDP process; and 6) classify OVDP certifications so that some can be worked by lower-graded revenue agents. To see the complete report, go to www.treas.gov/tigta/auditrepor ts/2016reports/201630030fr.pdf.
The statute of limitations remains open if you file a fraudulent tax return. In the case of John Finnegan et ux. (T.C. Memo. 2016-118) it was the fraud of the tax preparer that kept the statute open. The Court sided with the IRS in finding the taxpayers liable for tax deficiencies for 10 years. The court also found the taxpayers liable for the negligence penalty, noting that they did not review the returns or the question the entries, especially in light of the size of the refunds.
In Robert J. Squeri, et al. (T.C. Memo. 2016-116) the taxpayers' S corporation used the cash method of accounting and reported income based when the receipts were deposited in the bank. The IRS contended that under the duty of consistency, the taxpayers should be required to include on their 2009 returns amounts of 2008 income, as they originally reported. The taxpayers contended that gross receipts of $1,634,720 should be excluded from their 2009 income because they were actually received in 2008 and that respondent does not have authority to make adjustments for the taxpayers' 2008 tax year. The taxpayers further contended, and the IRS did not dispute, that the Tax Court did not have jurisdiction to make adjustments for their 2008 tax year and that the period of limitations for tax year 2008 was closed. The Court noted it has held that income properly accruable for one year is not deemed income for some other year, even if it was not reported for the proper year. Because the corporation was a cash method taxpayer, all of the checks received in 2008 should have been included in the corporation's gross income for that year. The duty of consistency, or quasi-estoppel, is an equitable doctrine which prevents a taxpayer from benefiting in a later year from an error or omission in an earlier year which cannot be corrected because the limitations period for the earlier year has expired. The Court noted that for the duty of consistency to apply, three requirements must be met. The Court found all three applied and concluded that the duty of consistency required that the $1,634,720 in gross receipts that the corporation received in 2008 but reported for 2009 be recognized as income for tax year 2009.
Tip of the Day
Divide and conquer . . . Ever have one of those projects that's so large or overwhelming you simply avoid tackling it? One approach to dealing with the problem is breaking it down into smaller pieces that you can deal with and complete. The completion of part of the project can provide enough satisfaction and confidence to be an incentive to continue on. Breaking down the project may also allow you to get help where that wouldn't be possible otherwise. While this sounds obvious, many times it's not to the person facing the job.
June 23, 2016
The House has passed a bill (HR 5447) that would permit small employers to offer stand-alone HRAs to their employees-referred to as a ‘qualified small employer HRA.’ This bill would also permit the use of the qualified small employer HRAs to purchase coverage in the ACA's public marketplaces.
The IRS has issued proposed regulations (REG-123854-12) that would clarify or modify certain specific provisions of the final regulations under Section 409A (T.D. 9321). This document also withdraws a specific provision of the notice of proposed rulemaking (REG-148326-05) published in the Federal Register on December 8, 2008 regarding the calculation of amounts includible in income under Section 409A(a)(1) and replaces that provision with revised proposed regulations. These proposed regulations would affect participants, beneficiaries, sponsors, and administrators of nonqualified deferred compensation plans.
The IRS has issued regulations (REG-147196-07) prescribing rules under Section 457 for the taxation of compensation deferred under plans established and maintained by State or local governments or other tax exempt organizations. These proposed regulations include rules for determining when amounts deferred under these plans are includible in income, the amounts that are includible in income, and the types of plans that are not subject to these rules. The proposed regulations would affect participants, beneficiaries, sponsors, and administrators of certain plans sponsored by State or local governments or tax- exempt organizations that provide for a deferral of compensation.
Tip of the Day
Rental expenses on co-owned property . . . You and your brother-in-law own a 50% interest in a two-family house that you rent. Your brother-in-law paid his half of the mortgage, but only $250 toward the $2,750 of insurance, maintenance, and other expenses. You paid the remaining $2,500. You can only deduct $1,375, your 50% share of the total. You should seek reimbursement for the other $1,125 from your brother-in-law.
June 22, 2016
The IRS has announced that all empowerment zone designations remain in effect through the end of 2016. Empowerment Zones are certain urban and rural areas where employers and other taxpayers qualify for special tax incentives. The announcement primarily affects businesses that would benefit from claiming the tax incentives for empowerment zones on their 2015 returns, either original or amended, and 2016 returns. The IRS issued Notice 2016-28 in March to address the relevant provision of the Protecting Americans from Tax Hikes Act of 2015. The notice provided that any nomination for an empowerment zone in effect on Dec. 31, 2014, will have a new termination date of Dec. 31, 2016, unless the governing state or municipality declined the extension in a notification to the IRS. The deadline for notification was May 24, 2016, and no state or municipality contacted the IRS to decline the extension. Therefore, all empowerment zone designations in effect on Dec. 31, 2014, remain in effect through Dec. 31, 2016.
Valuations of businesses and assets for estate purposes can be tricky. In Estate of Natle B. Giustina, Deceased, Laraway Michael Giustina, Executor (T.C. Memo. 2016-114) it was particularly so because the estate held a 41% interest in the partnership. The partnership was a going business with 12 to 15 employees that owned and cut timber on some 49,000 acres. The Tax Court first decided the case in T.C. Memo. 2011-141, giving weight to the value of the assets and to the ongoing business. The partnership was valued based on the cashflow, discounted to reflect risk and other factors. The case was appealed to the Ninth Circuit which reversed and remanded the case to the Tax Court. The Court of Appeals held that the value of the assets should not be considered, rather, to assume that the business would continue. The Tax Court revalued the estate property under the sole assumption the partnership would continue to carry on the business. Thus, the Tax Court revalued the property using the discounted cash flow method. In addition, the Court reduced the partnership-specific risk premium from 3.5% to 1.75%.
Tip of the Day
Make your offer upfront . . . If you're making an offer--20% off, free shipping, buy one-get one free, etc.--put the offer as early in your ad as you possible. Many prospects are no longer taking the time to read through a long ad, multi-page direct mail piece, etc. If the offer is a good one, it should grab their attention.
June 21, 2016
Fines and penalties are generally not deductible. That speeding ticket paid by your company isn't deductible, In Joseph P. Nacchio, Anne M. Esker (U.S. Court of Appeals, Federal Circuit) the taxpayer had been a CEO who engaged in insider trading. The taxpayer had reported the gain on his tax return and paid the taxes on the gain. Following his conviction on insider trading he had to forfeit his gains to the government. Trouble is, he had already paid the taxes. Following other cases, the Appeals Court ruled that the forfeiture was not deductible because it was punitive.
Splitting a business in a divorce proceeding can be particularly difficult. That's even more true if both parties were active in the business. In Joseph R. Belot (T.C. Memo. 2016-113) the taxpayer and his ex-wife had formed and jointly owned three businesses during their marriage. They were divorced in 2007. Pursuant to the settlement agreement entered into at the time of the divorce, they agreed to own and operate the businesses as equal partners. When it became clear that they were unable to operate the businesses together to their mutual satisfaction, the ex-wife filed a lawsuit against petitioner to gain full control over the businesses. In 2008, 16 months after the initial settlement and divorce, they entered into a settlement agreement under which the taxpayer transferred his interests in the businesses to his ex-wife in exchange for payment. The Court held the division of property held during the marriage accomplished by the 2008 settlement agreement qualifies for nonrecognition treatment under Sec. 1041.
Tip of the Day
FBAR due . . . The IRS is reminding taxpayers who have one or more bank or financial accounts located outside the United States, or signature authority over such accounts that they may need to file an FBAR by Thursday, June 30. By law, many U.S. taxpayers with foreign accounts exceeding certain thresholds must file Form 114, Report of Foreign Bank and Financial Accounts, (FBAR). It is filed electronically with the Treasury Department's Financial Crimes Enforcement Network (FinCen). In general, the filing requirement applies to anyone who had an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-Filing System website. If you exceed a higher threshold (generally beginning at $50,000) you may need to file Form 8938. Check the instructions.
June 20, 2016
Notice 2016-40 (IRB 2016-27) provides additional transition relief for employers claiming the Work Opportunity Tax Credit (WOTC) under Secs. 51 and 3111(e) of the Code, as extended and amended by the Protecting Americans from Tax Hikes Act of 2015. Specifically, this notice expands and extends by three months the transition relief provided in Notice 2016-22 (2016-13 IRB 488) for meeting the 28-day deadline in Sec. 51(d)(13)(A)(ii) of the Code. This notice applies to employers that (1) hire members of targeted groups (other than qualified long-term unemployment recipients) on or after January 1, 2015, and on or before August 31, 2016, or (2) hire members of the new targeted group of qualified long-term unemployment recipients on or after January 1, 2016, and on or before August 31, 2016. This notice does not otherwise modify or add to the guidance provided under Notice 2016-22.
It doesn't look like the IRS will be getting additional funding in the upcoming fiscal year (FY 2017). A Senate bill has funding at the same level as the current year. The House bill has an even lower level.
Tip of the Day
Rolling over an IRA? . . . If you receive property in an IRA distribution (e.g., stock, real estate, etc.), you can roll over the same property into another IRA or sell the property out of the first IRA and contribute cash to the second IRA. You cannot keep the property and substitute your own funds for property you received. If you sell the property in the IRA and roll over the entire proceeds, no gain or loss is recognized. For example, you purchased Madison Inc. in your IRA. You receive 500 shares which you sell to purchase a vintage car. The deal falls through and within the 60 days you contribute the $50,000 you received from selling the shares back to the original IRA. Because you didn't roll over the same property, the distribution is taxable and the early distribution can apply. To add insult to injury, the contribution of the $50,000 is an excess contribution subject to a 6% penalty. IRAs can be trickier than you might imagine. Check with your tax advisor to avoid mistakes.
June 17, 2016
The IRS has announced that the publicly available data on electronically filed Forms 990 will now be available for the first time in a machine-readable format through Amazon Web Services (AWS). Previously, this Form 990 data was only available in image files. This data, which includes filings from 2011 to the present, will now be available as an XML file that is downloadable from the web via AWS. The data includes Form 990, Form 990-EZ and Form 990-PF and related schedules with the exception of certain donor information. The IRS also redacts certain personally identifiable tax-identification numbers to prevent the data’s misuse. Data from Form 990-N (e- postcard) used by certain smaller exempt organizations is not available with this data, but it can be accessed through IRS.gov. Over 60 percent of all Form 990 returns are electronically filed with the IRS. Both paper and electronically filed 990 returns will continue to have image files made and these files will continue to be available by DVD.
The IRS has released guidelines on how wrongfully-incarcerated taxpayers can take advantage of the new retroactive exclusion from income for any civil damages, restitution or other monetary award received in connection with their incarceration. The guidelines are contained in a set of frequently-asked questions, posted on IRS.gov. Taxpayers who in the past received payments related to their wrongful incarceration and included those payments in taxable income can now file a refund claim for any income tax paid. To do this, eligible taxpayers must file Form 1040X for each year these payments were reported and write "Incarceration Exclusion PATH Act" at the top of each Form 1040X they submit. The new wrongful-incarceration exclusion was included in the Protecting Americans from Tax Hikes (PATH) Act enacted last December. This legislation provides a special one- year window during which an eligible wrongfully-incarcerated individual can file a refund claim based on any civil damages, restitution or other monetary award received and reported in a prior tax year, even if the normal statute of limitations had already expired for that year. Without this special provision, refund claims for tax-years 2012 and earlier would be barred in most cases. The deadline for mailing a claim under this special rule is Dec. 19, 2016.
Tip of the Day
Noncompete agreements . . . They're more common than ever. They're vital when you're buying a business, especially a professional one where the sellers are well known. They're also used to prevent employees or independent contractors from appropriating customers or trade secrets. But there's a limit on how restrictive the agreements can be. You can't prevent an employee or contractor from earning a living in the same field. Geographic restrictions can be used, but they can't be overly broad. The first time out you should definitely consider using an attorney qualified in the area. You don't want to use an agreement that won't hold up in court. That's can be as bad as having no agreement at all. And keep in mind that some states have their own restrictions on what can be included.
June 16, 2016
Victims of the severe storms and flooding that took place beginning on May 26, 2016 in parts of Texas may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of Texas. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Texas will receive tax relief. Individuals who reside or have a business in Austin, Brazoria, Brazos, Fort Bend, Grimes, Hidalgo, Hood, Montgomery, San Jacinto, Travis, Waller and Washington 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 May 26, and on or before October 17, 2016 have been postponed to October 17, 2016. This includes the June 15 and September 15 deadlines for making quarterly estimated tax payments, the 2015 corporate and partnership returns on extension through September 15, and the August 1 deadlines for quarterly payroll and excise tax returns. In addition, the IRS is waiving the failure- to-deposit penalties for employment and excise tax deposits due on or after May 26 as long as the deposits were made by June 10, 2016.
You don't have to have an actual distribution from an annuity or life insurance policy to have taxable income. In Kenneth L. Mallory et ux. (T.C. Memo. 2016-110) the taxpayer had taken loans out on a life insurance policy. When the debt exceeded the cash value of the policy and the taxpayer did not make a minimum required payment, the company terminated the policy. The Tax Court held on the extinguishment of the policy the taxpayers had a constructive distribution of the cash value of the policy. The taxpayers had income to the extent the gross distribution exceed the insurance premiums. The Court also found the taxpayers liable for the accuracy-related penalty because they received a Form 1099-R showing the taxable amount and the only tax advisor they paid for advice indicated the amount was taxable.
Tip of the Day
Alternate, residuary, and life estate beneficiaries . . . Even if you're having a lawyer draft your will (and, unless you have a very simple one we suggest you get professional help) you've got to know your options. You may decide to leave that 1969 Camaro to your brother, but what if he predeceases you? You may not want his reckless son to get it. You can specify someone else as an alternate beneficiary. That person will receive the property based on conditions that you can spell out in the will. Residuary beneficiaries receive property that hasn't been expressly left to other beneficiaries. Naming one or more residuary beneficiaries is important since it's unlikely your will will detail all your property. You should also name an alternate residuary beneficiary to anticipate the death of a primary one. A life estate beneficiary receives an interest in the property only for as long as he lives. On his death the property passes to a final beneficiary. For example, you leave that '69 Camaro to your brother to enjoy while he's alive, but on his death the car goes to your son. If your brother dies before you do, the property passes directly to your son.
June 15, 2016
The IRS is reminding taxpayers that effective in 2017, a new law requires the IRS to hold all Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) refunds until Feb. 15. This is likely to affect some returns submitted early in the tax filing season. The IRS encourages tax professionals to begin preparing for this change now. Planning is underway for a wider communication effort this summer and fall to alert taxpayers.
The Treasury Inspector General for Tax Administration (TIGTA) initiated an audit to determine whether the IRS’s controls over the auditing of amended individual tax returns with claims ensure that claims are properly evaluated and accurately processed and are effective in preventing the inappropriate issuance of tax refunds or allowance of tax abatements. TIGTA found IRS controls over the examination of amended individual tax returns with claims did not always ensure that claims were properly evaluated and were not always effective in preventing the potentially inappropriate issuance of tax refunds and allowance of tax abatements. TIGTA reviewed a statistical sample of 84 Fiscal Year 2013 closed surveys and audits of amended individual returns with claims for refunds or abatements of taxes and found that 31 claims were not appropriately substantiated and/or had large, unusual, or questionable items on the tax return that were not adequately considered and investigated. TIGTA’s evaluation indicated that a combination of factors caused these problems and that actions can be taken to better ensure that claims are substantiated (appropriate supporting documentation is obtained) and that issues on the amended returns are recognized, considered, and properly investigated. For the full report go to www.treasury.gov/tigta/auditrepo rts/2016reports/201630032fr.pdf.
Tip of the Day
Retirement planning . . . Many individuals and more than a few advisors) think that they'll be in a lower tax bracket in retirement. Generally, that's probably true. It's more likely to be true if you've got a regular job. But many small business owners break the mold. They may be selling out to retire and sitting on a sizable payout. Some will sell rental properties they've owned for years. Chances are they were frugal during the years they owned the business or investment property and saved for a rainy day. Some individuals will work far past normal retirement. Some will inherit substantial amounts. The lesson is not to believe the general rule. Analyze your situation and plan accordingly.
June 14, 2016
Revenue Ruling 2016-15 (IRB 2016-26) clarifies when a real estate developer may exclude cancellation of debt (COD) income under the qualified real property business indebtedness (QRPBI) exclusion in Sec. 108(a)(1)(D). Specifically, this revenue ruling provides examples to clarify that QRPBI includes indebtedness relating only to depreciable property used in a taxpayer’s trade or business, and not property held for sale to customers. The examples provide that indebtedness incurred or assumed in connection with property held by a real estate developer as rental property will qualify as QRPBI because the property is depreciable. On the other hand, because property held for sale to customers is not depreciable, indebtedness incurred or assumed in connection with this type of property is not QRPBI, and thus is not excludable under Sec. 108.
Notice 2016-39 (IRB 2016-26) provides guidance as to whether payments received by an employee from a qualified retirement plan during phased retirement are amounts received as an annuity under Section 72.
Revenue Procedure 2016-36 (IRB 2016-26) provides that Notice 2016-39, recovery of investment in the contract from payments received from a retirement plan by an employee during phased retirement, does not apply to amounts that are received from a non-qualified contract. The revenue procedure concludes that in applying the Sec. 72 regulations cited in the Notice to a non-qualified contract, the possibility of further contributions to the contract or a subsequent election under the contract to receive the benefit payable under the contract in a different manner generally will not affect the determination of whether distributions are amounts received as an annuity.
Tip of the Day
Rental property in an IRA? . . . Some taxpayers are using an IRA to buy a rental property (or a business). The advantage is that income from the property isn't taxed until you begin to take distributions-- and could escape tax completely if the IRA is a Roth. But there are several downsides. First, should the property need a cash infusion, (e.g., the house needs a new roof) any contributions to the IRA are limited by regular contribution limitations. Exceed that limit and there's a 6% penalty. Second, personal use of the property constitutes a prohibited transaction. That could include rental to a relative or related entity. There are other prohibited transactions. In some cases the penalty is disqualification of the IRA. That would make the entire amount taxable immediately. Finally, rental properties are often already tax shelters of sorts. They frequently operate at a loss or only a small profit in the early years and usually produce the bulk of their return when sold resulting in a capital gain. Get good advice before committing.
June 13, 2016
The IRS has issued final regulations (T.D. 9771) relating to the exclusion from gross income of discharge of indebtedness income of a grantor trust or an entity that is disregarded as an entity separate from its owner. These final regulations provide rules regarding the term "taxpayer" for purposes of applying the exclusion from gross income of discharge of indebtedness income of a grantor trust or a disregarded entity. These final regulations affect grantor trusts, disregarded entities, and their owners.
Tip of the Day
Advertising tied to cost structure . . . Your business plan and advertising is closely associated with your cost structure. For some businesses the operating costs are highly variable--that is they closely track sales. For example, you sell heating oil. Outside of one person to take orders, your biggest expenses are the oil and the cost of operating the delivery trucks. Double your sales and your profits will double. On the other hand, consider an old-line publishing company. Getting the first copy of a book to market doesn't depend on the number of copies sold. The up-front payment to the author, editing, typesetting, and printing a test run of maybe 3,000 copies are fixed. You'll make only a small amount if you sell only 3,000 copies. Your profit will be much more than double if you sell 3,000. If that's your situation, you can afford to spend more on marketing. Ten dollars spent on getting a new customer may return $8 in net profit. But the risk is all up front. Sell only 500 copies and you'll have a big loss. That's not true for the oil delivery service. He'll be profitable as soon as he makes enough to cover the payment on the truck and the driver's salary. Less risk, less reward. Keep the differences in mind when you're budgeting and planning, especially for a startup.
June 10, 2016
In Ugorji Onyeani, (U.S. District Court, N.D. Illinois) the IRS assessed a tax called a "termination assessment" before the tax was even due, under a law authorizing it to act when it believes that a taxpayer is obstructing the agency's ability to collect taxes for the current (or prior) tax year. The IRS believed that taxpayer was attempting to conceal his income; he had attempted to transfer hundreds of thousands of dollars abroad, and despite having over $800,000 in his bank accounts, the taxpayer had reported no income for the last several years. For his part, the taxpayer argued that the money in his accounts came from his legitimate crude-oil business. In June 2015, the taxpayer filed an administrative appeal, which was still pending when he filed the current District Court action on July 6, 2015. The Court scheduled an evidentiary hearing, which was delayed until March 2016 so that the taxpayer could recover from a serious medical condition. After considering the parties' briefs and evidence submitted at the hearing, the Court upheld the IRS's determination, finding that the tax assessment was reasonable and that the amount assessed was appropriate.
Tip of the Day
Putting your kids on the payroll for the summer? . . . Sharon's home for the summer and hasn't got a job. Does it make sense to hire her in your business? From a pure tax standpoint, you could come out ahead. But they'll have to do legitimate work and get a reasonable salary based on the work performed. And treat them like any other employee--withholding, unemployment insurance, etc. For more information on the topic, go to our article Putting Your Younger Children on the Payroll.
June 9, 2016
The IRS has issued final and temporary regulations (T.D. 9770) effecting the repeal of the General nd temporary regulations (T.D. 9770) effecting the repeal of the General Utilities doctrine by the Tax Reform Act of 1986 and preventing abuse of the Protecting Americans from Tax Hikes Act of 2015. The temporary regulations impose corporate level tax on certain transactions in which property of a C corporation becomes the property of a REIT. The temporary regulations affect RICs, REITs, C corporations the property of which becomes the property of a RIC or a REIT, and their shareholders. The text of these temporary regulations also serves as the text of part of the proposed regulations in the related notice of proposed rulemaking (REG-126452-15).
In James A. Ericson et ux. (T.C. Memo. 2016-107) the IRS claimed the taxpayers failed to keep adequate books and records and performed a bank deposits analysis to determine the taxpayer's gross receipts. After asserting significant underreporting ($64,905, $7,502, and $20,552 for the three years at issue) based on bank deposits the IRS conceded that the unreported amounts were $4,905 and $5,552 for two of the years and overreported income of $1,855 for one of the years. The Court did not agree with the IRS that none of the "badges of fraud" were present, It noted the amount of understated income was small and could have been the result of failing to maintain adequate records.
Tip of the Day
Forgiveness of mortgage debt . . . If a debt is forgiven, it generally results in income. Qualified mortgage indebtedness forgiven before January 1, 2017 can escape taxation. (This provision was just recently extended, but there's no guarantee it will be again.) But the debt must be acquisition indebtedness on your principal residence. That means only debt used to purchase or improve the residence qualifies. And, you'll have to reduce your basis in the property by the amount of debt forgiven. Note. There are other potential exclusions to income with respect to forgiven debt. Talk to your tax advisor.
June 8, 2016
The IRS has launched a more rigorous e-authentication process for taxpayers that will significantly increase protection against identity thieves impersonating taxpayers to access tax return information through the IRS Get Transcript online service. This enhanced authentication process will also provide a foundation for additional IRS self-help services in the future. This service was disabled last spring as a result of hacking. The new framework enables the IRS to require a two-step authentication process for all online tools and applications that require a high level of assurance. Tax transcripts are summaries of tax returns. Transcripts often are used for non-tax purposes, such as income validation for mortgages or student loans. To access the new Get Transcript Online feature, taxpayers must have an email address, a text-enabled mobile phone and specific financial account information, such as a credit card number or certain loan numbers. Taxpayers who registered using the older process will need to re-register and strengthen their authentication in order to access the tool. As part of the new multi-factor process, the IRS will send verification, activation or security codes via email and text. The IRS warns taxpayers that it will not initiate contact via text or email asking for log-in information or personal data. The IRS texts and emails will only contain one-time codes. New features also allow taxpayers to see the date and time the Get Transcript Online page was last accessed. Returning users must always receive and enter a text code prior to being able to obtain access. For more details see IRS Fact Sheet 2016-20.
In Felix Guralnik (146 T.C. No. 15) the IRS mailed the taxpayer a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330. On February 13, 2015, the taxpayer sent his petition to this Court via Federal Express First Overnight service, which was not then a "designated delivery service" under Sec. 7502(f)(2). The taxpayer's petition was required to be filed "within 30 days of a determination under this section." On the last date for timely filing of the petition, Tuesday, February 17, 2015, all Federal Government offices in the District of Columbia, including the Tax Court, were officially closed on account of Winter Storm Octavia. For that reason, the taxpayer's petition could not be delivered to the Court on that day. His petition was delivered to the Court and filed on Wednesday, February 18, 2015, when the Court reopened for business. Fed. R. Civ. P. 6(a)(3)(A) provides that, "if the clerk's office is inaccessible . . . on the last day for filing . . ., then the time for filing is extended to the first accessible day that is not a Saturday, Sunday, or legal holiday." Tax Court Rule 25(a), dealing with computation of time, does not address how time shall be computed when the Clerk's Office is inaccessible. Tax Court Rule 1(b), however, provides: "Where in any instance there is no applicable rule of procedure, the Court or the Judge before whom the matter is pending may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand." The Court held the 30-day filing period prescribed by Sec. 6330(d)(1) is jurisdictional and "equitable tolling" does not apply. The Court also held the taxpayer may not avail himself of the "timely mailed, timely filed" rule of Sec. 7502(f) because Federal Express First Overnight service was not "designated by the Secretary" as an approved private delivery service as of the date on which the taxpayer's petition was filed. Finally, the Court held in the absence of a Tax Court Rule prescribing the procedure when the Clerk's Office is inaccessible, the principles of Fed. R. Civ. P. 6(a)(3) are "suitably adaptable to govern the matter at hand." Because his petition was filed on February 18, 2015, the first accessible day that was not a Saturday, Sunday, or legal holiday, it was timely filed and the Court had jurisdiction to hear the case.
Tip of the Day
Tracking your customers . . . If your biggest customer accounts for only 1% of your sales, no reason to read further. But many small business owners are dependent on just a few customers and it's not unusual for a single customer to account for 30% or more of a company's sales. The percentage doesn't have to be a third of that amount before you should consider keeping good tabs on the customer. Has his buying pattern changed? Is he paying slower? Claiming shortages in orders? Are there rumors about his business? You don't want to come to work one morning to find out he declared bankruptcy, has switched to a new supplier, etc. Making up even a 10% drop in sales can be difficult. Make sure your sales staff and others who are in contact with the customer keep you informed. And monitor the customer's industry and markets.
June 7, 2016
Revenue Ruling 2016-12 (IRB 2016-26) provides the interest rates on tax overpayments and underpayments for the third calendar quarter beginning July 1, 2016. The interest rates will be 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for underpayments, 1 and one-half percent for the portion of a corporate overpayment exceeding 10,000, and 6 percent for large corporate underpayments. The rates are unchanged from the second quarter of 2016.
Tip of the Day
Frivolous return penalty . . . The IRS can assess a frivolous return penalty in certain situations. In one case the taxpayer claimed to be a "private governmental entity" not subject to taxation. The IRS assessed a frivolous return penalty of $5,000. A court found the taxpayer not competent to stand trial. But the IRS also claimed it could not abate the penalty. In IRS Chief Counsel Advice 201623010, the IRS said a taxpayer can request this reduction of the frivolous return penalty under Section 6702 by: 1) making a written for request for reduction on Form 14402 or a successor form, 2) remitting a payment of $500.00, 3) making the request before the United States files suit against the person for collection of the penalty; and 4) being in full compliance with all Federal tax filing and payment requirements. (See Rev. Proc. 2012-43 for more information.) (Note. IRS Chief Counsel cannot be cited as precedent.)
June 6, 2016
As a result of a severe winter storm and straight-line winds during the period of April 15 and 16, 2016 in certain areas of Montana, affected taxpayers in certain counties may be eligible for Disaster Relief. Taxpayers in the counties of Glacier, Liberty, Pondera, Teton and Toole who sustained losses attributable to the disaster may deduct the losses on their 2016 or 2015 tax returns.
Cancellation of indebtedness generally results in taxable income. There are several exceptions. One is for qualified principal residence indebtedness. In Aidan Ifeanyi Ogamba et ux. (T.C. Memo. 2016-105) the taxpayer could not show the Court that the debt canceled had been used to finance their principal residence or that the made an election to exclude the canceled debt from income. In another issue, the taxpayers provided no support for claimed losses on the sale of stock.
Tip of the Day
Part-time workers . . . It can be enticing to hire part-time or free-lance workers. You can save on fringe benefits, overtime, etc. and, in the case of free lancers, on employment taxes and unemployment insurance. But you're not building a core staff of loyal employees. Full-time employees are less likely to leave the job for a slightly better offer. Full-time workers generally have a better work ethic and lower absenteeism. And, whether you realize it or not, most businesses need a core of employees that can be counted on to run the business and train new workers. Moreover, turnover can be expensive and takes management time. There are exceptions. Sometimes using part-timers and freelancers may be the best answer such as when dealing with a seasonal or temporary influx of business. Think it through. Don't assume part-timers are the cheapest answer.
June 3, 2016
The IRS has announced that the MeF scheduled maintenance build window is being extended on Sunday, June 05, 2016. The system will be unavailable from 1:00 a.m. until 02:00 p.m., Eastern. The build will deploy critical system updates. This extended window affects the MeF Production and ATS Environments.
You may be able to deduct losses from an activity by grouping it with an offsetting profitable activity. But there has to be rational reasons for doing so. In Richard Steinberger et ux. (T.C. Memo. 2016-104) the taxpayers owned two entities that owned and operated a four-seater aircraft. The taxpayer was a pilot and a doctor. The Tax Court allowed the grouping of the ownership and operation of the aircraft, but did not allow the group of the entities with the doctor-husband's medical practice in which he had a one-seventh interest. The Court found the relationship between the entities was not sufficient. The Court noted the only doctor in the group that used the airplane for business was the taxpayer. Finally, the Court held the airplane activities were not for profit. The majority of the flights were for training or maintenance. The Court disallowed the losses from the activity.
Tip of the Day
Minority interests . . . If you own a minority interest in a closely held business you may have trouble getting information on its financial status. There's a good chance you signed a nondisclosure agreement. That's particularly true if you're only an investor. But you may have rights nonetheless. The first step is to check the bylaws. If you have no luck, consider consulting an attorney. You may have rights under state law.
June 2, 2016
The IRS has announced (Rev. Proc. 2016-32; IRB 2016- 22) that the user fee for Form 1023-EZ (streamlined application for exemption under Sec. 501(c)(3) has been reduced to $275.
Bills in the House and Senate would provide relief in limited situations from cancellation of indebtedness income where student loans are forgiven. Situations could include were students were defrauded or the colleges closed.
The IRS has issued a warning to taxpayers about bogus phone calls from IRS impersonators demanding payment for a non-existent tax, the "Federal Student Tax." Even though the tax season has ended, scammers continue to use varied strategies to trick people, in this case students. In this newest twist, they try to convince people to wire money immediately to the scammer. If the victim does not fall quickly enough for this fake "federal student tax", the scammer threatens to report the student to the police. For more information go to IRS Warns of Latest Scam Variation Involving Bogus "Federal Student Tax".
Tip of the Day
Incentive compensation . . . A bonus based on performance can work well for both the employer and employee. A properly designed plan can increase sales and/or profits for the company and compensation to the employee. A poorly designed plan can result in ill-will, lower profits from overpayments to employees, etc. Here are some thoughts.
June 1, 2016
If you've got a corporation (or LLC, etc.) you've got to be careful when winding down the entity. In Allied Transportation, Inc. (T.C. Memo. 2016-102) the Tax Court found the taxpayer's corporate charter had been revoked and, as a result the corporation did not have the legal capacity to prosecute the case. The Court noted that in Maryland, when a corporation forfeits its charter, "the powers conferred by law on the corporation are inoperative, null, and void as of the date of the proclamation of forfeiture. Thus, "all powers . . . , including the power to sue or be sued, are extinguished as of and during the forfeiture period. Nevertheless, Maryland law does "make it clear that a corporation continues to exist, at least for some limited purposes, beyond forfeiture or dissolution of its charter. Under Maryland law, a director of a forfeited corporation may bring suit in its name if there is a "rational relationship" between the suit and a legitimate "winding up" activity of the corporation.
Claim you mailed your return on time? Better be able to prove it. In Nicholas Kavuma (T.C. Memo. 2016 -101) the Tax Court noted that the IRS must offer sufficient evidence to indicate it is appropriate to impose the late filing penalty. To prove that the taxpayer filed untimely returns, the IRS offered IMFOL-T transcripts for the taxpayer's 2008, 2009, 2010, and 2011 taxable years and the testimony of the revenue agent. The revenue agent testified that the IMFOL-T transcripts were part of the IRS's regularly maintained business records. She further testified that each transcript recorded the date when the IRS received petitioner's return for that year. The dates of receipts recorded on the transcripts for 2008, 2009, 2010, and 2011 were August 10, 2010, August 16, 2010, August 2, 2011, and July 8, 2012, respectively. The revenue agent also testified that the transcripts indicated that the taxpayer had not been granted any filing extensions because there was no "EXT" notation next to any of the entries indicating the date of receipt. On the basis of the IMFOL-T. The Tax Court found the IRS met its burden of proof. The taxpayer produced no evidence to prove the IRS in error. The date of the signature on the return is not evidence of mailing. In a second issue, the Court found that the taxpayer had unreported income based on the IRS's use of the bank deposits method to reconstruct his income. The IRS was justified in doing so because the of the taxpayer's inadequate recordkeeping.
Tip of the Day
Residential or nonresidential rental property? . . . It makes a big difference for depreciation purposes. Residential property has a 27.5 year life; nonresidential 39 years. Sometimes the answer is obvious. You rent your home to a family with a one-year lease. Clearly it's residential property. But it can get trickier. To be a residential property the building must have at least one dwelling unit and at least 80 percent of the rental income is from dwelling units. If you rent out a portion of your home, the part you live in is considered a dwelling unit. If a portion of the house or apartment is used as office space, such as a doctor's office, the rent paid for that portion is gross rental income from the building, but not from a dwelling unit. For example, you rent a two-family home to two families. Fifty percent of the space is leased to a doctor's family, who uses half of their space for an office. Assuming equal rents, less than 80 percent (75 percent here) of the rental income is from a dwelling unit.
May 31, 2016
The IRS has announced that many taxpayers who made employment tax deposits on Monday, April 18, 2016, were incorrectly sent notices that their deposits were late. The IRS is apologizes for any inconvenience, and said that no taxpayer action is required. IRS systems have been corrected and impacted taxpayer accounts will be updated.
In Christine C. Peterson, Roger V. Peterson (U.S. Court of Appeals, Eleventh Circuit; Affirming in part and dismissing in part T.C. Memo. 2013-271)) the wife-taxpayer was a independent contractor and direct seller of cosmetics and related products for a well-known manufacturer. Because the taxpayer had advanced in the ranks she was entitled to be in a post-retirement, deferred-compensation program. The taxpayer received distributions from the company which were characterized as deferred compensation under a nonqualified plan. The Court found the post-retirement distributions were subject to the self-employment tax.
Tip of the Day
Exotic investments . . . There have always been investments other than the vanilla stocks and bonds. But in recent times Wall Street has invented a host of new vehicles. Investors are lured to them because they promise higher returns. But that also involves higher risk. One promises to return a multiple of the performance of an index--e.g., if the S&P goes up 5%, your return would be 15%. But the downside is ignored. In one case there's a cap on the return if the market rises, but no floor on how much you can lose if the market goes down. Some investments rely on leverage (debt) to enhance returns. Again, added return, but also added risk. Want some thrills? That's not unusual. If you must, put a small percentage of your investment in such vehicles. But that's not the place for your daughter's college fund or your retirement money. The old adage, "if you don't understand the investment, you shouldn't be investing" makes sense.
May 27, 2016
The IRS has announced that the spring 2016 issue of the Statistics of Income Bulletin is available on IRS.gov featuring preliminary data about individual income tax returns filed for Tax Year 2014. The Statistics of Income (SOI) Division produces the online Bulletin quarterly, providing the most recent data available from various tax and information returns filed by U.S. taxpayers. For prior data go to the historical data tables.
In Emmanuel A. Santos (T.C. Memo. 2016-100) the taxpayer had an accounting degree, prepared tax returns and earned a master's degree in taxation. At some point he enrolled in law school and on a Schedule C for a year deducted some $20,275 for law school tuition and fees. (He deducted other expenses but the case did not provide the amount of income reported.) The issue was whether the taxpayer could deduct his law school tuition. The Court noted that courts have held that a law degree qualifies a law student for a new trade or business (the business of being an attorney) and that thus the cost of a law degree is a nondeductible educational expense as set forth in the regulation. The taxpayer challenged the regulation, but the Tax Court rejected the arguments. It held the tuition was not deductible.
Tip of the Day
Got a good location? . . . Make sure you can keep it. Make sure you have a renewal option in your lease. It shouldn't cost you much, if anything, unless you want more favorable terms than normal. In most cases landlords don't mind renewals because keeping an existing tenant means avoiding the loss of rent during a vacancy, and not having to pay broker's commissions or alterations. It also saves by not having to spend time and money negotiating a new lease. Even then, most renewals are for one term. If you've got a 5-year lease, the option period is usually 5 years. Talk to an agent and attorney that understand real estate leases. More than one business has failed when forced to move to a new location, even a nearby one.
Copyright 2016 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536