Small Business Taxes & Management

News and Tip of the Day


Small Business Taxes & ManagementTM--Copyright 2015, A/N Group, Inc.

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July 31, 2015

News

Revenue Procedure 2015-39 (IRB 2015-33) provides a safe harbor for accrual method taxpayers to treat economic performance as occurring ratably on contracts that provide services on a regular basis. In other words, under the safe harbor, a taxpayer can ratably expense the cost of regular and routine services as the services are provided under the contract. Contracts for regular janitorial or landscape maintenance services are typical examples of contractual services that may qualify for the safe harbor. A service contract that provides for a single product to be delivered to the taxpayer, such as an environmental impact study, will not satisfy the definition of a Ratable Service Contract because the contract does not provide for services to be provided on a regular basis. The revenue procedure defines a Ratable Service Contract and provides examples of contracts that will and will not satisfy the definition. The revenue procedure also includes examples of bundled service contracts, which provide for both regular and one-time services. Whether part of a bundled service contract qualifies as a Ratable Service Contract depends on whether the parties have separately priced the services specified in the contract.

The Affordable Care Act imposes an excess tax of 40% on the excess benefits of high-cost employer-sponsored health coverage (Sec. 4980I; "Cadillac" plans) beginning in 2018. Notice 2015-52 (IRB 2015-33) is the second notice concerning Sec. 4980I and it is intended to supplement Notice 2015-16 concerning Sec. 4980I, issued on February 23, 2015. Notice 2015-52 addresses additional issues under Sec. 4980I, including the identification of the taxpayer who may be liable for the excise tax, employer aggregation, exclusion from the cost of applicable coverage amounts attributable to the excise tax, the age and gender adjustment to the dollar limit, the allocation of the tax among the applicable taxpayers, and the payment of the applicable tax. In this notice, Treasury and the IRS invite comments on the issues addressed in this notice and on any other issues under Sec. 4980I. After considering the comments on both notices, Treasury and IRS intend to issue proposed regulations under Sec. 4980I.

Capital gain or ordinary income? In David S. Stout et ux. (T.C. Memo. 2015-133) the taxpayer received a payment from his employer equal to the valuation of the stock incentive units (SIUs). The employer credited SIUs to accounts maintained for the benefit of certain employees. Each SIU was measured by the market value of the employer stock but employees did not have right, title or interest in any assets of the company. On a merger or acquisition of the company, the employee had the right to receive cash equal to the value of his account. The company was, in fact, sold and the taxpayer received cash but reported the amount as a capital gain. The Tax Court found that the taxpayer did not have an option to buy or sell the company's stock and had no interest in a capital asset. The Court held the amount received was ordinary income.

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.

 

July 30, 2015

News

In Kenneth A. McRae (T.C. Memo. 2015-132) the Tax Court found that the IRS settlement officer (SO) did not abuse his discretion when he sustained a Notice of Federal Tax Lien. The taxpayer failed to submit all the required financial information, was not current on his tax returns, did not contest the frivolous return penalties, and proposed no collection alternatives.

Settlements with the IRS are generally final. That is, if you and the IRS agree on an amount for a tax liability, penalty, etc. the agreement is final. One exception is a mutual mistake of fact at the time the settlement is entered into. In Marcia Billhartz, Executor of the Estate of Warren Billhartz (U.S. Court of Appeals, Seventh Circuit) after a settlement on the deductions for the estate a subsequent lawsuit by the decedent's children would allowed the estate to claim a larger deduction. The Appeals court sided with the Tax Court in finding that this wasn't a mutual mistake and the settlement could not be set aside.

Tip of the Day

Offsetting capital gains . . . The usual advice is to take losses if you've got capital gains for the year. But that general rule may not make sense for everyone. In some situations it may make more sense to avoid recognizing losses in the current year and save those losses for another year. This situation arises if your income is low enough that you're in the 20% or 15% bracket in which case your capital gains escape tax. Even if your gains will be taxed at 15%, itemized deductions, exemptions and credits could bring your tax to a small amount. Automatically taking unrecognized losses to offset gains may not make sense. Of course, you've got to look at the investments. If you think the investment will only head lower, you should sell regardless of the tax consequences. Talk to your financial and tax advisors. If you're on your own, use a tax preparation program to project the tax effects.

 

July 29, 2015

News

In Barbara Jane Knudsen (U.S. Court of Appeals, Ninth Circuit) the Court reversed the Tax Court (T.C. Memo. 2013-87) in a case involving the reimbursement of taxpayer's administrative and litigation costs by the Federal government. The Court noted the taxpayer made a qualified offer to settle her petition for judicial review of the IRS's denial of innocent spouse relief. The IRS allowed the offer to expire, but later conceded the taxpayer's entitlement to such relief. The Court explained that, given that the purpose of the Qualified Offer Rule is to encourage settlements by imposing litigation costs on the part not willing to settle and that the IRS was unwilling to settle this case on the terms and at the times offered by th taxpayer, the IRS could not subsequently sidestep the consequences of such refusal by conceding the issues after the taxpayer had effectively presented her case for disposition by the Tax Court. The Court held the concession (by the IRS) was not a settlement and the taxpayer was a prevailing party and entitled to litigation costs.

Tip of the Day

Minimum quantity of one . . . Requiring a minimum order in dollars or units (e.g., minimum order $50 or minimum quantity 10 units) makes sense for regular customers or when times are good. However, if you're trying to secure new customers, regain ones that have left, get customers to try new products, etc. consider making an exception to the rules. The approach is easy to implement for new customers or new products, but you've got to be careful with existing customers and products. You don't want to make so many exceptions that your minimum order policy is destroyed.

 

July 28, 2015

News

The IRS has once again updated the disaster notice for victims of the severe storms, tornadoes, straight-line winds and flooding that took place beginning on May 4, 2015 in parts of Texas (see IRS Announces Relief for Victims of Severe Storms, Tornadoes and Flooding in Texas for complete details) was updated to include Hood, Madison, Red River, Shelby and Wharton counties. The complete list of counties now includes Angelina, Bastrop, Blanco, Bowie, Brazoria, Caldwell, Cherokee, Cooke, Dallas, Denton, Eastland, Ellis, Erath, Fort Bend, Fannin, Fayette, Frio, Gaines, Grayson, Guadalupe, Harris, Harrison, Hays, Henderson, Hidalgo, Hood, Jim Wells, Johnson, Liberty, Madison, Milam, Montague, Montgomery, Navarro, Nueces, Red River, Rusk, Shelby, Smith, Travis, Trinity, Van Zandt, Walker, Wharton, Wichita, Williamson, and Wise. For more details go to www.irs.gov/uac/Tax-Relief-for-Victims-of-Severe-Storms-Tornadoes-Straight-line-Winds-and-Flooding-in-Texas.

The IRS has updated (July 27) the list of counties in Oklahoma where victims of the severe storms, tornadoes, straight-line winds and flooding that took place beginning on May 5, 2015 may qualify for tax relief from the IRS. The counties now include Adair, Atoka, Beckham. Bryan, Caddo, Canadian, Carter, Cherokee, Choctaw, Cleveland, Coal, Comanche, Cotton, Delaware, Garvin, Grady, Hughes, Jefferson, Johnston, Kiowa, Latimer, Le Flore, Lincoln, Logan, Love, Marshall, Mayes, McClain, McCurtain, McIntosh, Murray, Okfuskee, Oklahoma, Okmulgee, Ottawa, Pittsburg, Pontotoc, Pottawatomie, Pushmataha, Rogers, Seminole, Stephens, Tillman, Tulsa, and Wagoner.

Tip of the Day

Deduction only allowed to property owner . . . Taxes are deductible only by the person on whom they are imposed. A similar rule applies to expenses and interest. In one case the taxpayer deducted real estate taxes on his personal return on property owned by his S corporation. The taxpayer argued that the payments should be deductible because he paid them to prevent foreclosure on loans he guaranteed personally. The court didn't agree and disallowed the deduction. This is not an unusual situation. Either for convenience or because the business is short of cash, a shareholder pays the expenses of a corporation (or other entity). Generally, no deduction is allowed. There are two ways around the problem. Make a bona fide loan or capital contribution to the business and have it pay the tax. Alternatively, you can make the payment and have the business reimburse you by way of an expense report. But if you go the second route, talk to your tax adviser about the rules.

 

July 27, 2015

News

The IRS has issued final regulations (T.D. 9727) for filing a claim for credit or refund. The regulations provide guidance to taxpayers generally as to the proper place to file a claim for credit or refund. These final regulations clarify that, unless otherwise directed, the proper place to file a claim for credit or refund is with the service center at which the taxpayer currently would be required to file a tax return for the type of tax to which the claim relates, irrespective of where the tax was paid or was required to have been paid.

If the IRS informs an employer that an employee's wages are being levied upon, the employer must withhold the required amounts and turn them over to the IRS. Under the law, the employer is absolved from any liability to the employee. In a recent District Court case the Court held that the same rule applies to a landlord-tenant relationship. The tenant paid his monthly rent directly to the IRS in compliance with a levy. The Court held the tenant was immune to any claims from the landlord. John E. Burgess, Plaintiff v. Dennis Mineni Defendant. Dennis Mineni, Counterclaim-Plaintiff v. John E. Burgess, United States of America, Counterclaim-Defendants (U.S. District Court, E.D. California)

Tip of the Day

Buying vs. renting business property . . . Buying the property you use for your business often makes sense from a business and financial standpoint. Two important advantages are a lock on the location (particularly important for many retailers) and being able to avoid a sharp escalation in rent. But before committing make sure you understand the potential mortgage covenants. It's likely your business (or businesses) as well as the entity holding the property and you personally will be co-borrowers, or at least co-signers. That could impact your business by restricting borrowings by the business, restricting the sale of the business, etc.

 

July 24, 2015

News

The IRS has release proposed regulations (REG-115452-14) relating to disguised payments for services under Sec. 707(a)(2)(A) of the Code. The proposed regulations provide guidance to partnerships and their partners regarding when an arrangement will be treated as a disguised payment for services. This document also proposed conforming modifications to the regulations governing guaranteed payments under Sec. 707(c). The document also provides notice of proposed modifications to Rev. Procs. 1993-27 and 2001-43 relating to the issuance of interests in partnership profits to service providers.

The IRS has amended Notice 2015-47 (IRB 2015-30) regarding a structured financial transaction in which a taxpayer attempts to defer income recognition and convert short-term capital gain and ordinary income to long-term capital gain using a contract denominated as an option contract. The IRS believes this is a listed transaction.

You may be able to secure a charitable contribution deduction for a qualified conservation easement. However, one of the critical requirements is that the easement be granted in perpetuity. In Bosque Canyon Ranch, L.P. et al. (T.C. Memo. 2015-130) the Court found that the interests contributed were not qualified real property interests because they did not include a restriction, granted in perpetuity, on the use which may be made of the property. The Court noted the deeds permitted modifications to the boundaries between property on which homes would be constructed and property subject to the easements. In addition, the taxpayers reserved rights to conduct various activities having the potential to impair the easements' conservation interests. Because the in perpetuity requirement was not met for either contribution, the Court held the value of the contributions was zero. The taxpayers took a deduction for over $15 million. Thus, since the valuation misstatement exceeded 200% of the correct amount, the gross valuation misstatement penalty applied.

Tip of the Day

It's all relative . . . The IRS looks particularly careful at transactions between related parties because there's frequently a good chance for tax avoidance schemes. Loans, rentals, purchases of equipment or supplies, the provision of services, etc. could occur. Make sure that you or the other party reports the income. That's particularly true if the paying party is a business because the amount is probably deductible--and that means the other party has income. For example, you loan your brother-in-law $10,000. He defaults. You claim a bad debt deduction. He'll have $10,000 of income.

 

July 23, 2015

News

The Senate Finance Committee has approved an extenders package that provide for a two-year life of these measures. The package passed by a 23 to 3 vote which bodes well for movement in the full Senate. The research credit was not made permanent and there were a number of modifications to the extended provisions, but the foundation of the provisions remained in place.

You may be able to satisfy your unpaid tax liability through an installment agreement, but you've got to provide financial information and be current on your tax returns and tax obligations, including estimated taxes. In John A. Hartmann (T.C. Memo. 2015-129) the taxpayer argued the Appeals officer did not consider the taxpayer's health or age or give him time to file a delinquent return in denying him an installment agreement. The Court found the taxpayer failed to submit the requested return, required financial information, or any documentation of his health or age-related claims within a reasonable deadline and that the IRS did not abuse its discretion.

Gambling losses are generally limited to your gambling winnings for the year. However, if you're a professional gambler there's no such limitation. In James Boneparte, Jr. (T.C. Memo. 2015-128) the claimed to be a professional gambler and deducted substantial losses that offset income from a job. The Court applied the factors in Sec. 183, Not-for-Profit Activities (hobby losses) and held the taxpayer was not engaged in gambling with an expectation of profit. The Court denied him status as a professional. On another issue the taxpayer claimed bad debt losses from loans to relatives and friends. The Court noted that in the absence of convincing evidence loans to relatives are presumed to be gifts and are subject to special scrutiny. While the same scrutiny does not apply to loans to friends, a taxpayer must show the loans are bona fide and the taxpayer failed to do so. The Court denied the nonbusiness bad debt deductions.

Tip of the Day

Surviving a bear attack . . . The old joke is that to escape a bear you don't have to be fast, just faster than your buddy. The same is true in many business situations. You don't have to have the ultimate product or deliver the absolute best service, you just have to be better than your competition and your customers have to know it.

 

July 22, 2015

News

Announcement 2015-19 (IRB 2015-32) describes future changes to the determination letter program for qualified individually designed plans and sets forth an intended transition period for certain plans. Announcement 2015-19 requests comments on specific issues relating to the implementation of these changes. This announcement also provides that effective July 21, 2015, the IRS will no longer accept determination letter applications that are submitted off-cycle.

The Automated Underreporter Program matches taxpayer income and deductions submitted on information returns by third parties (e.g., employers, banks, brokerage firms) against amounts reported by taxpayers on their individual income tax returns to identify discrepancies. An audit by the Treasury Inspector General for Tax Administration (TIGTA) found that Automated Underreporter Program tax assessments increased significantly in recent years, from $4.24 billion in Fiscal Year 2006 to $7.84 billion in Fiscal Year 2013, an increase of 85 percent. During Fiscal Year 2013, the Automated Underreporter Program also assessed approximately $708 million in accuracy-related penalties; however, TIGTA found that such penalties were not always assessed when warranted. For instance, the Automated Underreporter Program’s system does not apply the negligence penalty provided for by law unless the taxpayer has repeated the same type of income omission within four consecutive tax years. Additionally, TIGTA’s review of Fiscal Year 2012 closed cases found that examiners were incorrectly waiving accuracy-related penalties, which resulted in about $3.25 million in lost penalty revenue. TIGTA also found that, due to an inaccurate programming condition, approximately $2.66 million in accuracy-related penalties were not assessed. TIGTA recommended that the IRS: 1) implement controls to ensure that accuracy-related penalties are assessed when warranted and only waived in accordance with applicable policies and procedures, 2) address system issues to ensure that accuracy-related penalties are accurately assessed when warranted, 3) continue to research and take action on cases TIGTA identified as having potentially inaccurate accuracy-related penalty amounts, 4) address negligence as it occurs rather than when a taxpayer repeats noncompliance, and 5) evaluate the effectiveness of the revised taxpayer notice. For the complete report, go to www.treas.gov/tigta/auditreports/2015reports/201530037fr.html.

In Sarah Grossnickle (T.C. Memo. 2015-127) the Court sided with the IRS in denying a home office deduction for a real estate agent. The taxpayer failed to show any portion of the dwelling unit was regularly and exclusively used for business purposes. She supported her claim with two Google "aerial view" photographs with handwritten notations. She produced no documentation, receipts, or canceled checks to substantiate the rental arrangement with her sister. The Court also denied phone and internet expenses for lack of substantiation. The Court also allowed a failure to file penalty assessed by the IRS. The taxpayer had a 1099-MISC for $17,409 (before claimed expenses) and did not file a return.

Tip of the Day

Check shipping invoices before paying . . . Sounds obvious. But many small businesses don't adequately check for billing errors in mundane invoices such as those for shipping charges. While individual errors may be small, spread over a large number of invoices, the total overcharge could be significant. Don't have the time to look at each one? Do a test on randomly selected invoices each month or quarter. If there are no errors, do another test a few months down the road. Construct a list of the optimum shipping methods and vendors for various shipments and make sure your employees check it. And be sure to update it regularly.

 

July 21, 2015

News

IRS Commissioner Koskinen has reported to Congress on partial results of the 2015 filing season with regards to the filing requirements of the Patient Protection and Affordable Care Act. Of particular note is the fact that some 710,000 taxpayers who received the advance premium tax credit of either not filed a return or extension. Some of these taxpayers probably would not normally have a filing requirement because of low income, but must reconcile the credit received. The IRS will be sending letters to these taxpayers. Koskinen also reported that a total of $1.5 billion in shared responsibility payments has been received from 7.5 million taxpayers.

The Government has released the agreement between the U.S. and the Republic of the Philippines with respect to the Foreign Account Tax Compliance Act (FACTA).

In Our Country Home Enterprises, Inc., et al. (145 T.C. No. 1) seven corporations entered into a purported welfare benefit plan (SP)consisting of separate plans that each participating employer customizes to apply to its employees alone. SP pays death, medical, and disability benefits. The death benefit SP agreed to pay was the face amount of an insurance policy that SP purchases on the employee's life. The employer effectively pays the premiums through payments to SP, and the insurance policy usually has a cash value component that increases annually. SP's payment of any nondeath benefit as to an employee is generally limited to the cash value of the insurance policy related to that employee. Two of the corporations were C corporations each owned by a single individual; one of the corporations was an S corporation owned equally by three individuals. Each of the five individuals was employed by the corporation he owned. The Court held the life insurance policies on the lives of the shareholder/employees were part of a split-dollar life insurance arrangement. The Court held that the economic benefit provisions of Sec. 1.61-22(d)-(g) applied and the shareholder/employees with insurance on their lives realized income. The Tax Court also held none of the corporate employers could deduct its payments to SP and that the taxpayers were liable for both the accuracy-related penalties under Sec. 6662 and 6662A (applicable to reportable and listed transactions).

Tip of the Day

Casualty loss definition . . . Casualty losses generally receive special treatment under the tax law. The IRS regulations state that in the case of an automobile owned by the taxpayer the damage must result from the faulty driving of the taxpayer or other person operating the automobile but cannot be due to the willful act or willful negligence of the taxpayer or of one acting in the taxpayer's behalf or the damage results from the faulty driving of the operator of the vehicle with which the automobile of the taxpayer collides. Note that if the damage is the result of your willful act or willful negligence, the loss doesn't qualify as a casualty loss.

 

July 20, 2015

News

The IRS has updated the list of counties in Oklahoma where victims of the severe storms, tornadoes, straight-line winds and flooding that took place beginning on May 5, 2015 and may qualify for tax relief from the IRS. The counties now include Atoka, Beckham, Bryan, Caddo, Canadian, Carter, Choctaw, Cleveland, Comanche, Cotton, Grady, Jefferson, Johnston, Kiowa, Latimer, Le Flore, Marshall, Mayes, McClain, McCurtain, McIntosh, Okfuskee, Oklahoma, Okmulgee, Pittsburg, Pottawatomie, Pushmataha, Rogers, Seminole, Stephens, Tillman, Tulsa, and Wagoner.

The IRS has released a draft version of Form 3115, Application for Change in Accounting Method. The form is only a draft and the IRS is requesting comments and there are no accompanying instructions as yet. There aren't many changes. Among the changes are ones to the questions for Sec. 381 and the questions referring to audit protect made by Rev. Proc. 2015-13. Another change is the require to attach an explanation of the legal basis supporting the purposed method for both automatic and non-automatic change requests.

Tip of the Day

Raising the rent? . . . Rents are going up in many parts of the country and, if you're a landlord, you shouldn't miss an opportunity to get a better return on your property. But you've got to know what the market will bear. You're on firmer ground if you have a new tenant lined up if the existing one decides to find cheaper quarters, there's little to no comparable space available, and the tenant needs the location. Retailers have certain requirements and location is a prime factor. That's not nearly as true for office tenants. Work through some numbers. How long would it take to rent the space if the tenant left? How much rent would you lose? What would you have to pay in commissions, legal expenses, alterations, etc. if a new tenant came on board? How would it affect the rest of the building? One national retailer occupied 25% of a local strip mall and refused to capitulate to the landlord's higher rent demand. The space has been vacant for 18 months. The retailer didn't really win either. The store isn't doing as well at the new location. If you're a tenant you can use a similar approach when negotiating. Figure how much the landlord will be hurt if you don't renew. And figure out how much a move would cost you. You don't want to refuse to pay an increase that will cost you $100,000 over 5 years if a move will cost you $200,000.

 

July 17, 2015

News

The IRS has just released a list of frequently asked questions and answers for registered domestic partners and individuals in civil unions. The FAQs can be found at www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-for-Registered-Domestic-Partners-and-Individuals-in-Civil-Unions.

In Christina M. Mehriary (T.C. Memo. 2015-126) the couple agreed to modify their divorce settlement. The taxpayer transferred a property to her ex-husband in satisfaction of her alimony obligation. She claimed a loss on the transfer based on a valuation of the property. The Court held that she could take no loss since the transfer was incident to a divorce. In addition, the transfer of the property was not alimony since it was not cash or a cash equivalent.

In another alimony case (H. Michael Muniz, T.C. Memo. 2015-125) the Tax Court noted that a lump-sum alimony payment under Florida law creates a vested right in the payee which would not end upon the payee's death. (In order to be alimony, payments must terminate on the death of the ex-spouse.) Thus, the amount paid was not alimony, but a nondeductible property settlement.

Tip of the Day

Liability for sales tax on sale of business . . . Many business owners don't realize that tax is due on the sale of business assets, just as if they were bought in a store. Most states have a bulk sales rule that requires the collection and remittance of tax when the assets of a business change hands. Specific rules may apply, such as a special form, certain amount of notice to the state, etc. If the tax isn't paid, it generally becomes the liability of the buyer. The state will generally have the upper hand if you don't file a return. Don't forget, if no return is filed the statute of limitations remains open and interest and penalties will run. Talk to your accountant.

 

July 16, 2015

News

The Senate way begin markup of an extenders package before the end of July. The plan is for a two-year extension, but there is considerable talk of making some of the provisions permanent.

The Treasury Inspector General for Tax Administration (TIGTA) performed an audit to determine whether IRS processes provide reasonable assurance that taxpayers are complying with provisions for taking required minimum distributions from their IRAs on reaching age 70-1/2. In response to prior TIGTA recommendations, the IRS developed a broad-based strategy that focuses on educating tax preparers and individuals about IRA rules and notifying potentially noncompliant taxpayers of the minimum distribution requirement. This is a significant improvement from our prior reporting. However, the IRS could also take steps to improve its strategy. As part of its strategy, the IRS developed educational materials for taxpayers and tax preparers. However, TIGTA believes taxpayers required to take distributions could benefit from more direct methods of communication. For example, informing taxpayers when they reach the age of 70½ that they are required to take a distribution could raise awareness and prevent significant penalties associated with noncompliance. As part of its strategy, the IRS also sent notices to nearly 1,500 potentially noncompliant taxpayers. The IRS is still in the process of evaluating the results of the sample of notices it distributed. If the IRS expands its notice program, TIGTA found that the IRS could enhance the methodology it uses and identify substantially more potentially noncompliant taxpayers. Expanding the number of taxpayers notified could increase revenue to the Federal Government. For the complete report go to www.treas.gov/tigta/auditreports/2015reports/201510042fr.html.

The law provides for special treatment of stock that is (1) transferred in connection with the performance of services and (2) is subject to a substantial risk of forfeiture until some time in the future (Sec. 83). The amount is includable in the income of the recipient when the substantial risk of forfeiture lapses and a similar amount is deductible by the employer when the employee recognizes income. However, in Qinetiq U.S. Holdings, Inc. & Subsidiaries (T.C. Memo. 2015-123) there was no documentation (such as an employment agreement) to show that the shares were transferred in consideration of services provided. The Court also noted during the years 2002 through 2006 the company (an S corporation) distributed income and losses to the employee as if he was the owner of the stock, and the company represented that he was the owner. The Court also noted stock transferred to other employees specifically indicated the transfers were for services, but not in the case of the employee in question. Moreover, property (or stock) is not transferred subject to a substantial risk of forfeiture if the facts and circumstances demonstrate that the forfeiture condition is unlikely to be enforced. The Court held the taxpayer failed to show the stock qualified as restricted stock and denied a deduction for compensation for services to the corporation.

Tip of the Day

Shred it . . . You know you should shred bank information and credit card statements when they're no longer needed, but here are some other items you should also toss in the hopper:

 

July 15, 2015

News

Notice 2015-51 modifies the effective date of Notice 2015-4 which provides guidance on the energy credit under Sec. 48 regarding performance and quality standards that small wind energy property must meet to qualify for the energy credit.

In Martin Olive the U.S. Court of Appeals, Ninth Circuit has affirmed the Tax Court's decision in Californians Helping to Alleviate Medical Problems, Inc. that Sec. 280E prohibits a medical marijuana dispensary from deducting any amount of ordinary and necessary business expenses associated with the dispensary.

Tip of the Day

Attorney-client privilege . . . Information you disclosure to your attorney, and what he tells you, is privileged and cannot be used against you if the communication was for obtaining legal advice. But that privilege is lost if either party discloses the information to outsiders. There's an exception to the latter. When the disclosure is made in a federal proceeding or to a federal office or agency, the disclosure does operate as a waiver if the disclosure is inadvertent, the holder of the privilege took reasonable steps to prevent disclosure, and the holder promptly took steps to rectify the error. You don't want information that you disclosed to your attorney used against you in court or a dispute with the IRS. Talk to your attorney about the privilege so that you completely understand it if you're going to rely on it.

 

July 14, 2015

News

It appears that Congress may make some changes to international taxation before the end of the year, but not complete reform.

The IRS has issued final regulations (T.D. 9726) regarding coverage of certain preventive services under the Public Health Service Act added by the Patient Protection and Affordable Care Act. The section requires coverage without cost sharing of certain preventive health services by non-grandfathered group health plans and health insurance coverage. The regulations provisions related to the process an eligible organization used to provide notice of its religious objection to the coverage of contraceptive services, and proposed regulations related to the definition of "eligible organization" which would expand the set of entities that may avail themselves of an accommodation with respect to the coverage of contraceptive services.

On July 10, 2015 the disaster notice for victims of the severe storms, tornadoes, straight-line winds and flooding that took place beginning on May 4, 2015 in parts of Texas (see IRS Announces Relief for Victims of Severe Storms, Tornadoes and Flooding in Texas for complete details) was updated to include Angelina, Erath, Frio, Jim Wells, Montgomery and Trinity counties. The complete list of counties now includes Angelina, Bastrop, Blanco, Bowie, Brazoria, Caldwell, Cherokee, Cooke, Dallas, Denton, Eastland, Ellis, Erath, Fort Bend, Fannin, Fayette, Frio, Gaines, Grayson, Guadalupe, Harris, Harrison, Hays, Henderson, Hidalgo, Jim Wells, Johnson, Liberty, Milam, Montague, Montgomery, Navarro, Nueces, Rusk, Smith, Travis, Trinity, Van Zandt, Walker, Wichita, Williamson, and Wise. For more details go to www.irs.gov/uac/Tax-Relief-for-Victims-of-Severe-Storms-Tornadoes-Straight-line-Winds-and-Flooding-in-Texas.

In an audit, the Treasury Inspector General for Tax Administration (TIGTA) reviewed a random sample of 50 of the 425 seizures conducted from July 1, 2013, through June 30, 2014, to determine whether the IRS complied with legal and internal guidelines when conducting each seizure. TIGTA identified 28 instances in which the IRS did not comply with a particular requirement in the I.R.C., the IRS Restructuring and Reform Act of 1998, or the Internal Revenue Manual. For example, the sale of seized property was not always properly advertised, and the amount of the liability for which seizures were made was not always correct on the notice of seizure provided to the taxpayers. For the complete report go to www.treasury.gov/tigta/auditreports/2015reports/201530048fr.html.

Tip of the Day

When a bargain is not a bargain . . . We're not talking about a cheap product. But you've seen the ads on the 'net. The usual price for the item is $10 each, but the offer is six for $27. A no brainer right? Probably. If the items don't have an expiration date. And it won't take you 10 years to use them. Or you won't be replacing the unit they're used with. It'll only take a minute to work through some rough numbers. If six units is a three-year supply, it might not be worth it. But if you use one a month, the offer truly is a no brainer. You may have other options such as splitting the order with a friend or another business or giving part to charity (be sure to allocate the cost).

 

July 13, 2015

News

In the wake of the Supreme Court decision in Obergefell with respect to same-sex marriage, the Social Security Administration is working with the Department of Justice to analyze the decision and provide instructions specific to the decision. It is encouraging those who may be eligible to apply right away for benefits at www.socialsecurity.gov/forms/apply-for-benefits.html.

If the IRS denies your refund claim you can petition the U.S. Court of Federal Claims. In James Widtfeldt (U.S. Court of Federal Claims) the Court dismissed the complaint for lack of subject matter and failure to state a claim upon which relief could be granted. The taxpayer alleged various claims, including entitlement to tax refunds arising from purported "death taxes" paid in 1999 and 2000. The Court noted that the taxpayer must file a refund claim with the IRS before taking action in court, which the taxpayer apparently did not do. Second, a claim must be filed within 3 years of filing the return or 2 years of paying the tax.

Tip of the Day

More, or less, reliable? . . . We'd like to think change is always in a positive direction. But that may not be true when it comes to reliability. The cars of 50 years ago may not have lasted as long, or had the features of today's vehicles, but they were also less likely to be essentially incapacitated by a computer failure, bad ground wire, etc. And, if something failed, chances are there was a mechanic in town that could get you going. Things have gotten more complex and complexity inherently decreases reliability. Many businesses today are built around the internet, but if for some reason your connection is lost (e.g., storm, cable cut, etc.) would you be able to get any work done? If you encounter outages regularly, such as some countries do in their power grid, you'd be prepared. Don't get lulled into a false sense of security. Consider where you're vulnerable and have backup plans.

 

July 10, 2015

News

This Listing Notice (Notice 2015-47, IRB 2015-30) applies to a type of structured financial transaction in which a taxpayer attempts to defer and treat ordinary income and short-term capital gain as long-term capital gain. The contract is denominated as an option contract that references a basket of actively traded personal property (i.e., securities). The contract allows the taxpayer to trade the securities referenced in the contract while the contract purportedly remains open, and the taxpayer does so. Consequently, option treatment is not warranted, and the income deferral and conversion to long-term capital gain is improper. The transaction described in the Listing Notice is similar to a transaction described in a companion Transaction of Interest Notice (NOT-110323-15); each of the Notices makes it clear that if a transaction is identified by both Notices, it is treated as a Listed Transaction.

This Transaction of Interest Notice (Notice 2015-48, IRB 2015-30) applies to a type of structured financial transaction in which a taxpayer attempts to defer and treat ordinary income and short-term capital gain as long-term capital gain. The transaction may be denominated as an option, notional principal contract, or forward contract. The contract may reference assets that are not actively traded, such as interests in hedge funds, and the taxpayer has the right to change the assets in the referenced basket. The taxpayer’s ability to control the assets in the basket raises the issue of whether the form of the transaction should be respected, and, thus, whether the income deferral and conversion to long-term capital gain is improper. The transaction described in the notice is similar to a transaction described in a companion draft Listing Notice (NOT-109093-14); each of the Notices makes it clear that if a transaction is identified by both Notices, it is treated as a Listed Transaction.

Notice 2015-49 (IRB 2015-30) informs taxpayers that the Treasury Department and the IRS intend to amend the required minimum distribution regulations under Sec. 401(a)(9) to address the use of lump sum payments to replace annuity payments being paid by a qualified defined benefit pension plan. The regulations, as amended, will provide that qualified defined benefit plans generally are not permitted to replace any joint and survivor, single life, or other annuity currently being paid with a lump sum payment or other accelerated form of distribution. The Treasury Department and the IRS intend that these amendments to the regulations will apply as of July 9, 2015, except with respect to certain accelerations of annuity payments described in the notice.

Cash or accrual? In James J. Isaacs (T.C. Memo. 2015-121) the taxpayer who operated two veterinary practices (one a wholly owned S corporation, the other a C corporation). On the S corporation's return for 2006, 2007, and 2008, the corporation reported using the accrual method of accounting. On audit of the S corporation's returns the examining agent noted accounts receivable balances on the return for two of the years with no balance in the third year. The corporation had a pay-at-the-time of service policy so it did not have accounts receivable with respect to its customers. In addition, the agent noted that she did not receive some of the taxpayer's accounting records and found that the bookkeeper made entries that would be more consistent with a cash method of accounting. The IRS claimed the corporation was using the cash method for book purposes and improperly accrued certain expenses. In addition, some expenses were disallowed because checks were drawn on one corporation to pay for expenses used by both entities. The Court sided with the taxpayer with respect to the cash v. accrual issue. It said that while the evidence was conflicting, the burden of proof was on the IRS because the Service first proposed changing the taxpayer's method of accounting in its amended answer. The Court also noted that Sec. 446(b) does not permit the IRS to change a taxpayer's method of accounting from one incorrect method to another incorrect method, a reference to the fact that the bookkeeper made errors, but the taxpayer intended to use the accrual method.

Tip of the Day

Keep tabs on suppliers . . . Just because a vendor has performed adequately in the past is no guarantee they'll continue to do so. They may have switched suppliers, had management or worker changes, financial difficulties, etc. that could alter their performance. You don't want to have to redo a project or get sued because of materials or work done by a vendor. Your customers may give you little sympathy for problems caused by your supplier. If you're not required by law, check periodically. How often? That depends. If there's a safety or health issue, redoing your work would be very costly, or you suspect an issue with the supplier, frequent checks are warranted. Don't automatically assume they're trying to cheat you. Bring the problem to their attention; it could be an innocent mistake. Consider checking more often if you're the sole or primary customer for the item. If it's not corrected then a change in vendors is warranted.

 

July 9, 2015

News

A bill has been introduced in the House and a companion bill in the Senate by a bipartisan group that would repeal the IRS holding that imposes fines on smaller businesses that help employees with health insurance costs and medical expenses by the use of Health Reimbursement Arrangements. The measure would apply to businesses and local municipalities with less than 50 employees.

In Richard C. Wagner (T.C. Memo. 2015-120) the Court sided with the IRS in finding the taxpayer had unreported rental income from a tenant that lived in his principal residence. In the same case, the taxpayer was unable to convince the Court that he had net operating losses from earlier years. The net operating loss carryover resulted from losses for 1998, 1999, 2000, 2003, and 2004. The Court noted that just because the periods of limitations may have expired for those years, the IRS does not have to accept and allow the loss carryovers claimed. In addition, there was no evidence that any losses would not have been absorbed by carrybacks.

Tip of the Day

Net operating loss carrybacks . . . For a number of years now most taxpayers have been able to carry back a net operating loss 2 years and forward 20. (This rule was modified for a few years during the recession.) You can relinquish the carryback period and just carry the loss forward, years during the recession.) You can relinquish the carryback period and just carry the loss forward, but you must make an affirmative election. On an individual return that's done by way of a separate election. But there's a 5-year carryback for farming losses and for qualified disaster losses and a 10-year carryback for a specified liability loss. In all three situations of these special situations you can elect a 2-year carryback instead.

 

July 8, 2015

News

On July 6, 2015 the disaster notice for victims of the severe storms, tornadoes, straight-line winds and flooding that took place beginning on May 4, 2015 in parts of Texas (see IRS Announces Relief for Victims of Severe Storms, Tornadoes and Flooding in Texas for complete details) was updated to include Bowie, Brazoria, Cherokee, Ellis and Harrison county. The complete list of counties now includes Bastrop, Blanco, Bowie, Brazoria, Caldwell, Cherokee, Cooke, Dallas, Denton, Eastland, Ellis, Fort Bend, Fannin, Fayette, Gaines, Grayson, Guadalupe, Harris, Harrison, Hays, Henderson, Hidalgo, Johnson, Liberty, Milam, Montague, Navarro, Nueces, Rusk, Smith, Travis, Van Zandt, Walker, Wichita, Williamson, and Wise. For more details go to www.irs.gov/uac/Tax-Relief-for-Victims-of-Severe-Storms-Tornadoes-Straight-line-Winds-and-Flooding-in-Texas.

Victims of a severe storms, tornadoes, straight-line winds and flooding that took place on May 5, 2015, in parts of Oklahoma may qualify for tax relief from the IRS. The IRS has once again updated the list of counties that qualify for relief. They now include Atoka, Beckham. Bryan, Caddo, Canadian, Carter, Choctaw, Cleveland, Comanche, Cotton, Grady, Jefferson, Johnston, Kiowa, Latimer, Le Flore, Marshall, Mayes, McClain, McCurtain, McIntosh, Okfuskee, Oklahoma, Okmulgee, Pittsburg, Pottawatomie, Pushmataha, Rogers, Seminole, Stephens, Tillman, Tulsa, and Wagoner. Certain deadlines falling on or after May 5, and on or before August 31 have been postponed to August 31, 2015. For more details go to www.irs.gov/uac/Tax-Relief-for-Severe-Storms-Tornadoes-Straightline-Winds-and-Flooding-in-Oklahoma.

Notice 2004-8 was issued some years ago by the IRS to address a type of transaction taxpayers are using to avoid Roth IRA contribution limits. In such transactions a taxpayer's preexisting business enters into transactions with a corporation owned by the taxpayer's Roth IRA, in certain cases the acquisition of shares, the transactions or both are not fairly valued and thus have the effect of shifting value into the Roth IRA. That was the issue in Summa Holdings, Inc., et al. (T.C. Memo. 2015-119). Basically, a DISC (domestic international sales corporation made payments claimed to be commission payments to another entity whose stock was held by IRAs. The IRS recharacterized the payments as dividends to the shareholders followed by contributions to the Roth IRAs. The contributions to the Roths were in excess of the contribution limits resulting in an excise tax deficiency. The Tax Court agreed.

Tip of the Day

Seven-year car loan? . . . While they may be gain in popularity, they're generally not a good idea. An old rule of thumb was to match the loan to the asset being financed. A 30-year mortgage makes sense for a home--it should last a lot longer than that, and there's a good chance it'll appreciate. But the odds are that you'll be getting rid of the car before the loan is up. That means paying off the loan just when you'll need money for the downpayment on a new car. And, if you need a seven-year loan it could mean you're buying too much car. As always, there can be exception such as a combination of a wrecked car and a cash flow problem with your business.

 

July 7, 2015

News

In Wayne L. Brown (U.S. District Court, S.D. Ohio, East. Div.) the IRS mistakenly issued the taxpayer a tax refund that was $15,000 more than what he was actually due. The taxpayer didn't dispute the fact that he was not entitled to the $15,000. The IRS discovered the error a year later and sent the taxpayer a notice of intent to levy. The taxpayer entered into an installment agreement to repay the amount, but later requested a hearing to challenge the levy. The IRS denied the his request. He made a second request which was also denied. The taxpayer averred that the IRS's actions, specifically attempting to collect the erroneous refund via a levy, violated the Code. As a result, he sued the IRS pursuant to Sec. 7433 which provides for civil damages for certain unauthorized collection actions. The Court found that while it appeared that the IRS may have improperly attempted to collect the erroneous refund via levy, the taxpayer's claim was barred by the statute of limitations in Sec. 7433 which allows two years from the date of the Notice of Intent to Levy.

You can provide your representative with a number of powers to act on your behalf through an IRS power of attorney form (2848). But in the case of Steven N. Levi et ux. (T.C. Memo. 2015-118) the power of attorney attached to the tax return did not authorize the agent to sign the return. The Court noted that neither taxpayer was disabled or injured such that they were unable to sign nor were they continuously absent from the U.S. for a period of at least 60 days. Since the taxpayers did not sign and the agent was not authorized, the Court found it was not a valid return.

Tip of the Day

Health care penalty on employers . . . Employers with 50 or more full-time employees must provide employees with health care or face a penalty. More than a few small businesses who don't provide insurance help employees defray the cost of insurance by reimbursing them for their purchase of coverage. Unfortunately, under the law doing so can subject the employer to a penalty of $100 per day per employee up to a maximum of $500,000. Imposition of the penalty, previously delayed, took effect July 1, 2015. Several small business groups are trying to change the law and there are bills in Congress that would do so, but until then you don't want to run afoul of the rules. It could be very costly.

 

July 6, 2015

News

In Jeffrey T. Webber (144 T.C. No. 17) the taxpayer, a U.S. citizen, established a grantor trust that purchased "private placement" variable life insurance policies insuring the lives of two elderly relatives. The taxpayer and various family members were the beneficiaries of these policies. The premiums paid for the policies, less various expenses, were placed in separate accounts whose assets inured exclusively to the benefit of the policies. The money in the separate accounts was used to purchase investments in startup companies with which the taxpayer was intimately familiar and in which he otherwise invested personally and through private-equity funds he managed. The taxpayer effective dictated both the companies in which the separate accounts would invest and all actions taken with respect to these investments. The IRS argued the taxpayer retained sufficient control and incidents of ownership over the assets in the separate accounts to be treated as their owner for Federal income tax purposes under the "investor control" doctrine. The powers the taxpayer retained included the power to direct investments; the power to vote shares and exercise other options with respect to these securities; the power to extract cash at will from the separate accounts; and the power in other was to derive "effective benefit" from the investments in the separate accounts. The Tax Court held the IRS rulings enunciating the "investor control" doctrine are entitled to deference and weight. The Court also held the taxpayer was owner of the assets in the separate accounts for Federal income tax purposes and was taxable on the income earned on those assets during the taxpayer years in issue. Finally, the Court held the taxpayer was not liable for the accuracy-related penalties (Sec. 6662(a)) because he relied in good faith on professional advice from competent tax professionals.

Tip of the Day

Education exclusion for gift tax . . . You can avoid any gift tax consequences if you pay your grandchildren's tuition or medical expenses--but only if you pay them directly to the provider. For example, you cut a check to the college or doctor. Any other approach will not qualify for this special exclusion. But before doing so you should keep in mind that the check will count as untaxed income to the parents. If the parents might otherwise qualify for financial aid, that cold seriously reduce the amount.

 

July 2, 2015

News

Victims of a severe storms, tornadoes, straight-line winds and flooding that took place on May 5, 2015, in parts of Oklahoma may qualify for tax relief from the IRS. The IRS has updated the list of counties that qualify for relief. They now include Atoka, Beckham. Bryan, Caddo, Canadian, Choctaw, Cleveland, Comanche, Cotton, Grady, Johnston, Kiowa, Le Flore, Marshall, McClain, McCurtain, McIntosh, Oklahoma, Pittsburg, Pottawatomie, Rogers, Seminole, Tillman and Wagoner. Certain deadlines falling on or after May 5, and on or before August 31 have been postponed to August 31, 2015. For more details go to www.irs.gov/uac/Tax-Relief-for-Severe-Storms-Tornadoes-Straightline-Winds-and-Flooding-in-Oklahoma.

In an audit, the Treasury Inspector General for Tax Administration (TIGTA) found the IRS has made progress in providing taxpayers with online customer service options. However, it needs to prioritize the completion of key information technology projects that are needed to provide the electronic platform for developing future projects that will provide taxpayers with dynamic online access capabilities. Although the IRS Commissioner noted that the IRS expects to deliver these capabilities in three to five years and IRS stakeholders continue to emphasize the importance of providing taxpayers with online account access, additional funding needs to be committed to fully complete the key information technology projects. The Service on Demand Initiative is the IRS’s latest attempt to deliver such capability and contains specific projects that will provide online account access options. This initiative identified 71 projects to improve customer service but does not adequately emphasize dynamic online account access when assigning a priority rank to these projects. For example, TIGTA determined that 12 of the 71 projects directly address providing taxpayers with dynamic online account access or improved digital communication. For the complete report go to www.treas.gov/tigta/auditreports/2015reports/201540053fr.html.

In Don Warner Reinhard (T.C. Memo. 2015-116) the IRS was able to convince the Court the taxpayer substantially understated his taxable income for the year at issue and was liable for the fraud penalty. The taxpayer claimed a passthrough loss from an S corporation of some $554,622 despite the fact that no such loss was taken on the S corporation's return. Moreover, ten days after the taxpayer filed the return, he submitted a different version of the return to a bank while applying for a loan which omitted the $554,622 deduction. The Court noted that many of the "badges of fraud" were present. In addition to other factors, the taxpayer substantially understated his income, engaged in inconsistent and implausible behavior when he reported substantially higher income on his loan application than on his income tax return and attempted to conceal assets during his bankruptcy proceeding.

Tip of the Day

Selling to small business owners? . . . Whether you're selling to the business or the owners themselves, most are short on time. Going through a big sales pitch and holding back on the fact that this model is twice the price of their current system, won't work with their computers, etc. could end up wasting their time and yours. Is it new technology that needs an explanation? Make sure you can explain it quickly and accurately. If it sounds too complicated you could lose your audience quickly.

 

July 1, 2015

News

Notice 2015-43 (IRB 2015-29) notice provides interim guidance based in part on the definition of expatriate health plans set forth in the temporary relief under ACA Implementation Frequently Ask Questions (FAQs) Part XIII (issued March 8, 2013) and Part XVIII (issued January 9, 2014). Additionally, the notice provides guidance on the requirements for certain individuals to be considered qualified expatriates under the EHCCA. The notice does not apply to the health insurance providers fee imposed by section 9010 of the ACA.

In Ruey Read (T.C. Memo. 2015-115) the taxpayer claimed the capital gains generated by a brokerage account in her name was not income to her, arguing that the account and a checking account had been opened by her ex-husband. The Court did not believe a fraud defense applied. It noted the brokerage account application required her signature and a copy of her signed driver's license. Her signature on the power of attorney form that authorized her ex-husband to buy and sell stocks on the account was consistent with her signature on her driver's license and on the brokerage account application. The Court found it implausible that her ex-husband would have traced the miniature version of her signature on her driver's license to create a larger replica on the account application and power of attorney as the taxpayer claimed. In addition, she received monthly statements from the account to her solely controlled post office box address during the year at issue. The Court found she at least had knowledge of the account. The checking account in issue had been opened some ten years before the taxpayer was alerted to any possible fraud on the account. The Court held the accounts and the income belonged to her.

Tip of the Day

Critical workers should be employees . . . For many business owners it would be nice if all your workers could be independent contractors. You'd save on unemployment, FICA, worker's compensation, health insurance, etc. But that's generally neither possible nor a good idea. Workers who are critical to the business should generally be employees. You want to be able to rely on the workers, keep information confidential, maintain continuity, etc. Another point. If the workers are essential to your business (e.g., licensed plumbers for a plumbing contractor) there's a better chance the IRS or the state may find the workers are employees even if you call them independent contractors.

 

June 30, 2015

News

Victims of the severe storms, tornadoes, straight-line winds and flooding that took place beginning on May 7, 2015 in parts of Arkansas 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 Arkansas will receive tax relief. The President has declared Crawford, Garland, Howard, Jefferson, Little River, Miller, Perry, Sebastian, and Sevier counties a federal disaster area. Individuals who reside or have a business in these counties may qualify for tax relief. For more details go to Tax Relief for Victims of Severe Storms, Tornadoes, Straight-line Winds and Flooding in Arkansas.

On June 25, 2015 the disaster notice for victims of the severe storms, tornadoes, straight-line winds and flooding that took place beginning on May 4, 2015 in parts of Texas (see IRS Announces Relief for Victims of Severe Storms, Tornadoes and Flooding in Texas for complete details) was updated to include Fayette county. The complete list of counties now includes Bastrop, Blanco, Caldwell, Cooke, Dallas, Denton, Eastland, Fort Bend, Fannin, Fayette, Gaines, Grayson, Guadalupe, Harris, Hays, Henderson, Hidalgo, Johnson, Liberty, Milam, Montague, Navarro, Nueces, Rusk, Smith, Travis, Van Zandt, Walker, Wichita, Williamson, and Wise.

Tip of the Day

Machinery sales tax exemption . . . Most states provide a sales tax exemption for tools and machinery used in manufacturing, agriculture, etc. Often determining whether or not a machine qualifies for the exemption is easy. You make kitchen cabinets. Items such as drill presses, shapers, etc. qualify. But sometimes what qualifies isn't as obvious. A trailer used in the plant yard to move items between buildings? It may have to be used substantially or exclusively in the production process. There's often a better chance it would qualify if it can't be used over the road. Ask your tax advisor to check state law. Most states have a list of rulings on such items. Can't find a decision on the item? You should be able to make a formal ruling request to the state.

 

June 29, 2015

News

In Obergefell v. Hodges the U.S. Supreme Court has held that all states must allow and recognize same-sex marriages. Before the ruling 14 states did not allow or recognize such unions. Since any legal same-sex marriage has already been recognized for federal tax purposes (e.g., recognition provided based on where the marriage occurred, not where the couple live), the major effects will be that same-sex couples no longer need to get married out of state and on state income tax returns.

The Trade Preferences Extension Act has passed both the House and Senate. The bill extends for six years a refundable tax credit for health care for taxpayers who are eligible for trade adjustment assistance. The bill increases the penalties for failure to file certain information returns.

In an audit, the Treasury Inspector General for Tax Administration (TIGTA) found the IRS did not have effective controls in place to prevent the award of contracts to corporations with certain Federal tax debt and/or felony convictions. TIGTA identified 17 corporations that were awarded a total of 57 contracts valued at about $18.8 million during FYs 2012 and 2013, while they had Federal tax debt. The IRS has not established a definition of Federal tax debt for this purpose and does not perform proactive tax checks to comply with this Federal law. In addition, TIGTA found that the IRS did not follow the Department of the Treasury requirement to insert specific language in solicitations requiring corporations to assert whether or not they have certain Federal tax debt and/or felony convictions. Based on a statistical sample of contracts awarded in FYs 2012 and 2013, TIGTA found that the IRS did not require corporations to self-certify prior to contract award, as required, for any of our 143 sample cases. Finally, TIGTA identified three contracts worth more than $67,000 awarded to one corporation with a felony conviction within the preceding 24 months prior to award. IRS contracting officers did not include the required Department of the Treasury self-certification language in any of these three contracts. For the full report, go to www.treas.gov/tigta/auditreports/2015reports/201510011fr.html.

Tip of the Day

Purchase orders . . . Small businesses often forgo issuing a purchase order when buying items. A verbal order may work for smaller items that aren't critical to the business, can be purchased elsewhere, are standard items, etc. For example, you regularly order paper from a local supplier. He's unlikely to surprise you by making a substitution, delivering late, etc. But if he does, it won't affect your business. It's different if you're ordering supplies for a contract you're working on. The parts must meet certain specifications and they have to be delivered by a certain date. You don't want to take a chance on a misunderstanding or mistake. Put the purchase order in writing and get confirmation from the vendor. Concentrate on the critical terms. Make it clear that a mistake will be costly for you. That puts the supplier on notice.

 

June 26, 2015

News

In a 6-to-3 decision, the Supreme Court has upheld an important provision of the Affordable Care Act, finding the payment of subsidies to those individuals who get health insurance through the federal exchange is legal. The decision removes a major uncertainty to the Affordable Care Act.

Normally you can't challenge the existence or amount of your underlying tax liability in a collection due process hearing. In Ifeanyi Obiakor (T.C. Memo. 2015-112) the taxpayer was allowed to do so because he did not receive a copy of Letter 1153. But the Court found the IRS did not abuse its discretion in sustaining a levy because the taxpayer did not provide requested documentation and did not present collection alternatives.

Were it not for Sec. 351 the contribution of assets to a newly formed corporation in exchange for stock might be construed as a sale. In J. Michael Bell, Sandra L. Bell, and MBA Real Estate, Inc. (T.C. Memo. 2015-111) the Court found that the transfer of assets to a corporation was a capital contribution and not a sale. The taxpayers transferred property to the corporation in exchange for payments over time. The Court looked at 11 factors and found that the transaction was a contribution of capital and the payments the taxpayers received were dividends.

Tip of the Day

Get big or sell out . . . Some businesses owners want to grow as big as possible; many others are happy to have a good, stable business that provides a comfortable living. But sometimes you don't have an option. A big firm is buying up the smaller players in your industry. You may have to sell out to the big firm early or run the risk your business will decline after they're done consolidating in your area. Some businesses may have other options such as diversifying, buying up weak similar businesses in the area to become a big factor in a small market, etc. There's no easy answer here. If you're nearing retirement, selling out may make the most sense. But probably the worst thing you can do is nothing. That will insure a poor ending.

 

June 25, 2015

News

The IRS has updated two retirement plan related FAQ pages on its Web site--Reporting IRA and Retirement Plan Transactions and Retirement Plans Frequently Asked Questions.

In William Billy Devy (T.C. Memo. 2015-110) the taxpayer argued that he should not have to repay the $1,853 overpayment because the IRS applied that amount to pay his child support debt. The Tax Court held that the fact hat a tax overpayment for a particular year was applied to a child support debt does not affect whether a taxpayer must pay a deficiency subsequently determined for the same tax year. Whether an overpayment for a given taxable year is refunded directly to a taxpayer or is intercepted for past-due child support, the IRS nevertheless may determine that there is a deficiency in tax for that year. The Court also found that it lacked jurisdiction to review the application of the taxpayer's overpayment to his outstanding child support debt.

Tip of the Day

Cutting your losses . . . Many individuals think they can time the market. Well, it isn't easy; even many pros fail at it. But there's something worse than bad timing and that's holding on to a losing investment. Knowing when to sell an investment is just as important as picking the right one in the first place. You bought Madison Inc. 6 years ago because it had a unique product line and marketing flexibility. There are now several competitors, two of them much larger, that have much the same line and some of Madison's marketing tricks no longer work. It looks like Madison's one-trick pony is being put out to pasture. Whether you're ahead or behind, holding on now makes little sense. The same reasoning can be applied to your own products or services. In the case of most businesses, times change--and the rate of change has been accelerating. You shouldn't bail at the slightest downturn, but you've got to take a realistic look and if there's a fundamental change in the market that you can't work around, you should seriously consider shutting the line, operation, etc.

 


Copyright 2015 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536


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