Small Business Taxes & ManagementTM--Copyright 2017, A/N Group, Inc.
For the full text of new Revenue Rulings, Revenue Procedures,
Regulations, etc. go to:
Internal Revenue Bulletins
For a Tax Court Case:
Tax Court Cases
For IRS News Releases (current month):
News Releases and Fact Sheets
For Fact Sheets:
For Letter Rulings and Technical Advice Memoranda:
IRS Written Determinations
For IRS Forms and Publications:
Forms and Publications
November 22, 2017
NewsThe provision in the Senate version of the Tax Cuts and Jobs Act bill repealing the Affordable Care Act's (ACA) mandate requiring health insurance may not make to the version to be voted on by the full Senate. The provision could derail the tax bill and President Trump is currently more interested in a tax bill on his desk than repealing the individual mandate.
The IRS’s electronic filing (e-file) Provider Program offers taxpayers an alternative to filing a traditional paper tax return. It enables tax returns to be sent to the IRS in an electronic format via an authorized IRS e-file Provider. A Provider is generally the first point of contact for most taxpayers filing a tax return through the e-file Provider Program. In an audit, the Treasury Inspector General for Tax Administration (TIGTA) found the IRS is still not verifying citizenship status for all individuals on e-file applications. TIGTA’s review identified 45 approved applications that listed a Principal or Responsible Official who was not a U.S. citizen or resident alien according to Social Security Administration records at the time of application. The review also identified 1,494 individuals associated with approved applications despite the fact that Social Security Administration records do not show a citizenship status for them. TIGTA’s review of a statistical sample of 34 approved e-file Program partnership applications identified nine (26 percent) that omitted at least one partner with a five percent or greater ownership interest in the partnership. TIGTA estimates that 256 of the 969 partnership applications omitted one or more partners. In addition, EFINs are not timely deactivated for deceased Principals and Responsible Officials of firms. Of 965 EFINs with deceased Principals and Responsible Officials, 349 were still active, and for 399, the IRS took an average of 1,080 days to deactivate the EFIN. Lastly, referrals of 328 EFINs used to file potentially fraudulent tax returns were not consistently evaluated or forwarded to the Electronic Products and Services Support organization. The Return Integrity and Compliance Services organization did not evaluate the 328 EFINs for potential fraud, and only 104 were evaluated for identity theft. For the complete report go to www.treasury.gov/tigta/auditreports/2018reports/201840003fr.pdf.
If the IRS sends a notice of deficiency assessing additional tax, you're entitled to a hearing before levy also called a collection due process hearing. The Appeals officer (AO) can deny a face-to-face hearing under certain circumstances. In Paul B. Muir (T.C. Memo. 2017-224) the taxpayer appealed his denial of a face-to-face hearing. The Tax Court found the AO did not abuse his discretion in doing so because the taxpayer did not provide financial information. The failure by the IRS to note an address change was not a factor because the taxpayer was advised of the requirement to provide the information.
IRA transfer to charity . . . If you're taking distribution from an IRA because you have to take required minimum distributions, making them directly to a charity can provide more tax benefits than simply making a charitable contribution. Using this approach the charitable contribution portion of the IRA distribution never shows up in your adjusted gross income. The lower AGI can be beneficial because it's used to determine a number of phaseouts. IRA owners age 70½ or older can transfer up to $100,000 per year to an eligible charity tax-free. The transfer can count toward your required minimum distribution for the year. Funds must be transferred directly by the IRA trustee to the eligible charity. Talk to your tax advisor.
November 21, 2017
NewsFor the second year, the IRS, state tax agencies and the tax industry, partners in the Security Summit, will host National Tax Security Awareness Week to encourage both individual and business taxpayers to take additional steps to protect their tax data and identities in advance of the 2018 filing season (IR-2017-190). There are three key steps the Summit partners urge people to take to protect tax and financial information:
--Learn to recognize and avoid phishing emails, threatening phone calls and texts from thieves posing as legitimate organizations such as banks, credit card companies and government organizations, including the IRS. Do not click on links or download attachments from unknown or suspicious emails.
--Always use security software with firewall and anti-virus protections. Make sure the security software is always turned on and will automatically update. Encrypt sensitive files such as tax records stored on computers. Use strong passwords.
--Protect personal data. Use strong, unique passwords for each online account. Don't routinely carry Social Security cards, and make sure tax records are secure. Treat personal information like cash; don't leave it lying around.
As we reported last week, the Senate's version of the Tax Cuts and Jobs Act is out of committee. The big differences in the two bills are:
--the Senate bill repeals the Obamacare mandate;
--the Senate bill has seven brackets to the House's 4;
--the mortgage interest deduction is retained by both, but the House version provides a lower cap on the related debt;
--the House version repeals the deduction for medical expenses, the Senate version does not;
--the House version retains up to $10,000 deduction for state and local taxes, the Senate version repeals it completely;
--the Senate version sunsets the tax rate reductions for individuals in 2025; and
--the Senate version delays for one year the drop in the corporate tax rate.
While it would appear that the differences are such that they could be ironed out in a Conference Committee, there are few sure things in politics.
If you're a partner in a partnership or shareholder in an S corporation, the entity's income is passed through and reported on your individual tax return. You've got to report what's on the K-1. If there is an error there are procedures to handle it. It makes no difference how much of the profits are distributed to the partners or shareholders. In Jay Enis et ux. (T.C. Memo. 2017-222) were shareholders in an S corporation where there was a falling out of the shareholders. The taxpayers filed a Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request with their tax return, claiming the S corporation initiated litigation contesting the taxpayer's ownership interest and that the entity and certain shareholders had prevented them from exercising some of their ownership rights. For those reasons, the taxpayers did not include their share of the S corporation's income on their return. The Tax Court found the taxpayers were not deprived of their beneficial ownership and had to include the their pro rata share of the S corporations's income.
Tip of the DayEmployee discounts . . . They're generally a good idea. They improve morale and often can be less expensive than provide a like amount of additional salary. And who doesn't like to get something at a discount? The IRS has their eye on discounts. Done the wrong way, at least part of the discount could be additional income to the employee. In the case of property, the discount can't exceed the gross profit percentage of the price at which the property is offered to customers. In the case of services, the discount can't exceed 20% of the price at which the services are offered to customers. Discounts in excess of this amount taxable income to the employee. For example, Andersen Marine will haul a boat out of the water, wash the bottom, put it on a cradle and shrinkwrap it for the winter for $40 a foot. Fred, an employee, has Andersen perform the services on his 35 foot boat. The charge would normally be $1,400, but Andersen charges Fred only $1,000. With a 20% discount his cost would be $1,120. The extra $120 of discount is taxable income to Fred and has to be included on his W-2. The rules can quickly become involved because of the different situations that can be encountered. However, a short talk with your tax adviser and you should be able to devise some simple guidelines that keep it simple.
November 20, 2017
NewsThe IRS is reminding (IR-2017-189) employers and other businesses of the Jan. 31 filing deadline that now applies to filing wage statements and independent contractor forms with the government. The Protecting Americans from Tax Hikes (PATH) Act includes a requirement for employers to file their copies of Form W-2 and Form W-3 with the Social Security Administration by Jan. 31. The Jan. 31 deadline also applies to certain Forms 1099-MISC filed with IRS to report non-employee compensation to independent contractors. Such payments are reported in box 7 of this form. Employers should verify employees' information now. This includes names, addresses, Social Security or individual taxpayer identification numbers. They should also ensure their company's account information is current and active with the Social Security Administration before January. If paper Forms W-2 are needed, they should be ordered early. An extension of time to file Forms W-2 is no longer automatic. The IRS will only grant extensions for very specific reasons. Details can be found on the instructions for Form 8809 .
You may be able to deduct attorney's fees in defending yourself in an IRS action, but you've got to meet certain requirements. In Claudia Appelbaum(U.S. Court of Appeals, Fourth Circuit) the Court found no reversible error of a District Court that the IRS's position that it was substantially justified in claiming the petitioner was a responsible person liable for the truat fund recovery penalty. While the petitioner was found not responsible, the IRS had a number of pieces of circumstantial evidence that a reasonable person would have found convincing.
Tip of the DayRead the fine print . . . Many bills (e.g., your monthly cell phone bill) specify that if you want to contest the bill, you might have only 30, 60, 90, etc. days to do so. Miss the deadline and you could be out of luck. Best advice? Review your bills as soon as possible after receiving them; certainly before paying them. That's also true for bank and other financial statements.
November 17, 2017
NewsThe House has passed its version of the Tax Cuts and Jobs Act 227 to 205 with no Democrats voting for it and 13 Republican defectors. The Senate Finance Committee has voted (12 to 10, along party lines) the bill out of committee and to be voted on by the full Senate. Passage in its present form there is less certain. And, even if passed, the differences between the House and Senate must be ironed out--another job that is unlikely to be easy.
If you work in a foreign country, you may be able to exclude all or a portion of your income from Federal income tax. But you've got to strong proof that you're a resident of the foreign country. That can include the amount of time spent in the country, the establishment of a home (as opposed to using hotel rooms), the nature of temporary absences from the foreign country, etc. In Robert Hudson et ux. (T.C. Memo. 2017-221) the taxpayer was a pilot for Korean Airlines, but never established a presence enough to meet the residence test in that country. As a result, the Court denied the exclusion.
Small businesses often operate through several entities and, even if there is only one operating entity, funds often go back and forth between the owners and the business. When there are multiple entities funds often flow between entities. In many cases the flow of funds is allowed, but only if the rules are met. Related party transactions often come under enhanced scrutiny. In VHC, Inc. and Subsidiaries (T.C. Memo. 2017-220) there was a holding company and five subsidiaries controlled by one family. During the years at issued the taxpayer advanced some $111,000,000 to the principal stockholder or hsi related companies. The amount included guaranties of the principal shareholder and his related companies' debts, lines of credit, nonguaranteed advance, and payments to his and his related companies' creditors. For the years 2004 through 2013 the company claimed partially worthless bad debt deductions for some $92,000,000. The IRS challenged the taxpayer's contention that the advances were really debt. The Court looked at the ten factors usually examined to determine if the advances were bona fide debt. The Court noted the risky nature of the advances, the fact that the debt would be hard to enforce and the debt brought increased management participation. While many of the advances were supported by promissory notes, they carry little weight when related parties are involved. The notes had a fixed maturity date, but that was meaningless since many of the notes were routinely renewed withhout any payments of principal or interest. In addition, the company's records contained errors with respect to the notes. The Court found they were not bona fide debt.
Tip of the DayReusable coupons . . . Instead of putting a one-shot coupon in a flyer, newspaper, etc. consider a reusable one with an expiration date. The concept can be useful to get customers to frequent the restaurant, store, etc. and convert them to regular customers. The idea is best suited to a business where customers return regularly--grocery store, deli, restaurant, hardware store, etc. It's probably not for a retailer where purchases are relatively infrequent.
November 16, 2017
NewsCancellation or forgiveness of debt by a creditor generally results in income to the debtor. The logic is he or she has become richer by the amount forgiven because money they received in the past won't have to be repaid. In FloEtta Bullock (T.C. Memo.2017-219) the taxpayer was not the primary obligor on the loan. While she simply intended to cosign for her son and daughter-in-law in the purchase of a truck she unwittingly signed paperwork indicating that he was the primary obligor on the loan. However, after the paperwork was signed, the lender dealt only with the taxpayer's son and daughter-in-law and testified that they never intended the taxpayer to be the primary obligor. She made no payments on the loan, never used the truck didn't know she was the primary obligor until trial.The Court noted a guaranty creates a contingent liability where a party's obligation to make a payment under the guaranty is contingent upon the primary obligor's failure to pay the debt. The guarantor of a contingent liability generally does not recognize income upon discharge of a debt. Such a discharge creates no previously untaxed accretion in assets that would result in an increase in net worth that constitutes income. The Court held the taxpayer had no cancellation of debt income.
In In re: Brothers Materials Ltd., A Texas Limited Partnership, Debtor (U.S. District Court, S.D. Texas) the IRS sought to collaterally attack the Bankruptcy Court's order confirming the Debtor's Chapter 11 Bankruptcy Plan. The District Court held that the incontrovertible truth was that the IRS did not object to the Plan or directly appeal the confirmation order. Yet when the Debtor filed a motion to enforce an unambiguous Plan provision in the Bankruptcy Court, the IRS changed course, asserting for the first time the Court's alleged lack of jurisdiction to confirm the Plan. The Court agrees with the Bankruptcy Court's holding that the time to make such a challenge has long since passed and that its confirmation order was res judicata. The District Court affirmed the judgment of the Bankruptcy Court.
Tip of the DayGet creative with rental property . . . If you're renting out one or more houses, there's not much you can do if the demographics, etc. change. Chances are the property is zoned residential and there's not much you can do about it. But if you own a strip center, small shopping center, etc. you may have options. Instead of the traditional retail stores you might be able to rent to an urgent care center, service business, even offices and churches. Before courting different tenants, make sure you're zoned for the change and that there are no clauses in other tenants' leases preventing such action. You should even consider consulting existing tenants. You don't want existing tenants not renewing because of the new tenants.
November 15, 2017
NewsWork continues on the Tax Cuts and Jobs Act proposal. The Senate version eliminates all deductions for state and local taxes; the House bill would retain a deduction for the first $10,000 of real estate taxes. This could be a sticking point from several angles. President Trump has said the bill can't eliminate all state and local tax deductions. And if things weren't challenging enough, there is talk of adding repeal of the Obamacare individual mandate to the legislation.
In Robert E. Smith, III et ux. (T.C. Memo. 2017-218) the IRS issued a notice of deficiency determining a $623,795 income tax deficiency and a $124,759 accuracy-related penalty for the taxpayers' 2009 tax year. During 2009 the taxpayers transferred their personal assets of cash and marketable securities to a wholly owned S corporation, which in turn transferred the assets to a family limited partnership. The taxpayers dissolved the S corporation and received the partnership interest in the dissolution of the S corporation. Through this structure and the transfer of their personal assets, the taxpayers claimed an ordinary loss deduction on the liquidating distribution by using a substantially discounted value for the assets held by the partnership. They conceded that to the extent they are entitled to a loss deduction for 2009, it should be characterized as a short-term capital loss. After concessions the issues for consideration are whether the taxpayers: (1) are entitled to deduct a short-term capital loss for 2009 relating to the dissolution of the S corporation and (2) are liable for a Section 6662(a) accuracy-related penalty for 2009. The IRS contended the taxpayers were not entitled to deduct the 2009 loss upon the dissolution of the S corporation because the partnership structure lacked economic substance, or in the alternative, the loss deduction did not meet the Section 165 requirements for a bona fide loss incurred in a trade or business or a transaction entered into for profit. The taxpayers argued that there were legitimate business purposes for starting the entities (to manufacture a product in which the taxpayer had an interest) but their plans changed. The Court did not find the taxpayers claims credible. It found the transaction lacked economic substance and the taxpayers were not entitled to any loss for the year at issue. In addition, despite the plan was conceived by an attorney who was also a CPA and tax professional, the Court found the taxpayers liable for the accuracy-related penalty.
Tip of the DayDon't apologize for crossed invoices . . . If you're sending out the second or third invoice, don't apologize for the possibility the customer may have already mailed his payment. If you're sending the second invoice, he's already late, so no apology is necessary. Moreover, the apology may indicate weakness.
November 14, 2017
NewsRev. Proc. 2017-59 modifies Rev. Proc. 2015-13, as clarified and modified by Rev. Proc. 2015-33, and as modified by Rev. Proc. 2016-1. Rev. Proc. 2015-13 provides procedures for obtaining the consent of the IRS to change a method of accounting for federal income tax purposes. With respect to elections under Sec. 404A of the Internal Revenue Code, which are treated as changes in method of accounting for purposes of Sec. 481, this revenue procedure specifies the Sec. 481 adjustment period.
Revenue Ruling 2017-22 provides the covered compensation tables effective Jan. 1, 2018.
The IRS is serious about businesses that fail to remit employment taxes. Not only is the business liable for the taxes, any responsible individual can be held personally responsible. That was the situation in S. P. Davis, Sr., Willie J. Singleton, Andrew Davis, Jr., Defendants-Appellants (U.S. Court of Appeals, Fifth Circuit). The Government attached a lien to commercial property owned by all three appellants and a fourth party to force the sale of the property. Only two of the property owners were liable for the employment taxes, but the Government decided to foreclose on the property and sell it rather than sell the partial interests. The Court noted that Sec. 7403 allows the Government to enforce a lien against property that a tax debtor owns by forcing a sale of such property. The Court also noted that in Rodgers the Supreme Court enumerated several factors for courts to consider in deciding whether or not to allow foreclosure. The district court considered the facts of the case in light of those factors and correctly found that they weigh in favor of the forced sale. The Court held the District Court did not err in ordering the forced sale of the property. (The Court determined that this opinion should not be published and is not precedent.)
Tip of the DayNoncompete agreement . . . If you're selling your business, more than likely you'll be asked to sign a noncompete agreement. Generally, there's nothing wrong with that. However, you should make it conditional on the buyer fulfilling his side of the deal. For example, if he defaults on the payments on a note, the noncompete becomes voidable. It gives you some leverage and allows you to get back in the business, if you want. Talk to your attorney. You'll probably want other guarantees.
November 13, 2017
NewsThe U.S. has tax treaties with many foreign countries. The treaties govern the taxation of many intercountry transactions. In Zhongxia Ye (T.C. Memo. 2017-216) the petitioner was a citizen of China with an accounting degree. She worked as an accountant in China but wanted to get a Ph. D. and entered the U.S. on an F-1 visa to get such a degree n business administration. She entered the U.S. in 2001 and left only twice. In 2006 she accepted a full-time, permanent, tenure track positiion as an assistant professor of accounting at Kennesaw State University. Her employment was extended for the academic year starting in August, 2007. In 2008 petitioner earned wages of $94,747 from working as an assistant professor at KSU. She hired a CPA to prepare her 2008 Form 1040NR, U.S. Nonresident Alien Income Tax Return (return). In that return, she claimed her wages of $94,747 were “income exempt by a treaty”. A Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), attached to petitioner's 2008 return states in pertinent part: Taxpayer is hired as an assistant professor by the Kennesaw State University (a public state university of Georgia) primarily to teach, lecture and conduct research on August 14, 2006 on a H1B1 visa status. An alien individual is treated as a resident of the United States with respect to any calendar year if the individual: (1) is a lawful permanent resident of the United States at any time during the calendar year; (2) meets a substantial presence test; or (3) makes a first-year election to be treated as a resident of the United States. The IRS argued the petitioner was a resident alien under the substantial presence test for tax years 2008 and 2009. The Court sided with the IRS and found the petitioner met the substantial presence test for those years and was a resident of the U.S. The treaty provides an exception for individuals who are a resident of the other contracting state (China) and temporarily present in the first-mentioned contracting state (U.S.) for the primary purpose of teaching, giving lectures, or conducting research . . . The Court noted that the petitioner didn not have any plans to move out of the U.S., citing the application for permanent residency and the limited trips outside the U.S. The Court found the contingencies as to continued work in the U.S. to be remote. The Court found the petitioner was not "temporarily present" in the U.S. for 2008 and 2009 and her earnings were not exempt under the treaty.
Tip of the DayPlanning a year-end charitable contribution of stock? . . . Don't delay too long. The gift to a charity of a prperly endorsed stock certificate is completed on the date of mailing or other delivery to the charity or to the charity's agent. However, if you give a stock certificate to your agent or to the issuing corporation for transfer to the name of the charity, your gift is not completed until the date the stock is transferred on the books of the corporation.
November 10, 2017
NewsThe Tax Cuts and Jobs Act has been reported out of the House Ways and Means Committee with a 24 to 16 vote. The bill now moves on to the House floor. There are a number of substantive differences between the House and Senate versions, several of which may be hard to reconcile for political reasons. The Senate version is more generous in a number of ways, but would delay the effective date of the 20% corporate rate for a year. The Senate version includes more individual brackets along with a lower starting rate and lower top rate. Whether or not these differences can be ironed out and a compromise bill approved by the full House and Senate is still open.
In response to the extreme need for charitable relief for victims of the 2017 California Wildfires, employers may have adopted or may be considering adopting leave-based donation programs. Under leave-based donation programs, employees can elect to forgo vacation, sick, or personal leave in exchange for cash payments that the employer makes to charitable organizations described in Sec. 170(c) of the Code (Sec. 170(c) organizations). Notice 2017-70 provides guidance for income and employment tax purposes on the treatment of cash payments made by employers under leave-based donation programs for the relief of victims of the 2017 California Wildfires.
Tip of the DayBonuses--year deductible . . . If you're on the accrual method of accounting, you can deduct amounts in one year that are paid in the following year, but only if (1) all the events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect to the liability. That means that in order to deduct bonuses in 2013, the amount is determined with certainty and you have a legal obligation to pay the amount at the end of the year. If there is doubt as to the amount or there's no legal obligation, you can't deduct the amount until actually paid. Check with your tax advisor to be sure. Make sure you provide him or her with all the facts. If the deduction in 2013 would be valuable, you may want to cut the checks this year and deal with the cash flow consequences.
November 9, 2017
NewsThere have been several changes to the House bill on tax reform and there is talk of more to come, even before any word from the Senate. There may be some fear that the bill as first introduced needs to be sweetened to survive.
In Dana D. Messina and Nancy G. Messina; Kyle R. Kirkland and Stephanie Layne (T.C. Memo. 2017-213) during 2012 M and K together owned 80% of S1, an S corporation, which owned Q, a qualified subchapter S subsidiary. Q was the borrower under a loan from an unrelated entity. M and K formed S2, a wholly owned S corporation, to acquire the loan. M and K contended that S2 should be disregarded for Section 1366(d)(1)(B) purposes and the loan deemed indebtedness of S1 to them, allowing them to increase their bases in S1's indebtedness and take into account its pass-through losses. The IRS maintained that S2's separate corporate existence should be respected and the loan not be treated as indebtedness of S1 to M and K. The Tax Court held that S2 was not the incorporated pocketbook of M and K, that S2 was neither an agent of M and K nor a conduit, that M and K had made an actual economic outlay to S2, which in turn made an actual economic outlay to S1 and Q. The Court also hald the step transaction doctrine did not apply and M and K were bound by the form of their transaction.
You may be able to discharge your tax liabilities in bankruptcy, assuming you filed a timely return. But like other debts, discharge is not automatic. In In re: Matthew L. Feshbach and Kathleen M. Feshbach, Debtors. Matthew L. Feshbach and Kathleen M. Feshbach, Plaintiffs (U.S. Bankruptcy Court, M.D. Flordia) the taxpayers had not filed returns for some 10 years and owed a substantial amount in taxes. The Court noted that the Plaintiffs alleged inability to pay this debt resulted from a conscious decision to spend their considerable income to support an excessive lifestyle based on a conviction that it takes money to make money. While such a conviction may in some instances prove true, it cannot excuse the Plaintiffs' intentional failure over the course of more than a decade to pay their tax debt while at the same time realizing in excess of $21 million in income ($13 million of that from tax years 2002-2010) and living what most would consider a luxurious life. Consequently, they are not entitled to a discharge of any of their tax debt.
Tip of the DayBackup executor . . . Serious consideration should be given to naming one in your will. Even if you've discussed it with your first choice he or she may end up declining or not up to the task when the time comes. There could be any number of reasons. Don't forget that person may not be called on for many years.
November 8, 2017
NewsThe IRS is advising taxpayers that they may receive Letter 6002 from the IRS about missing information related to health care coverage. You should read the letter carefully and, if you agree with the information in the letter, you must file Form, 1040X, Amended Individual Income Tax Return to correct your tax return. That could be as simple as checking "yes" for full year coverage, or filing a completed Form 8965 Health Coverage Exemptions with the 1040X or entering the payment amount on line 9 of 1040X to report a shared responsibility payment for months without coverage or coverage exemption. For more information go to Understanding Your Letter 6002.
Tip of the DayInvolved in a nonprofit? . . . Many business owners are. They're often a good way to network, find potential customers, etc. But they're not without risk. You don't want to be involved in an organization that ends up getting bad press. You probably run a tight ship with your business (or you should) with respect to internal controls. You don't want employees stealing inventory, embezzling, etc. Apply that same concern to the nonprofit, whether you're an executive or on the board. Many workers may be volunteers or underpaid employees and controls may be very lax because of short staffing making embezzlement much easier than in a regular business.
November 7, 2017
NewsYou may be able to recover your attorney and litigation costs if you're the prevailing party in a dispute with the IRS. But you've got to meet a number of requirements. One of them is that your net worth at the time of filing your petition is less than $2 million. In Bonnie J. Angle (U.S. Court of Appeals, Ninth Circuit) the Court held the taxpayer failed that test. The Court noted that net worth is calculated according to generally accepted accounting principles, and assets are valued at their acquisition cost. The petitioner's assets included a loan owed to her of some $3.5 million. The petitioner's accountant valued the loan at only $838,000, claiming the remainder was worthless. The Court felt the evidence didn't support the discount and noted the Tax Court (from where the case was appealed) was not bound by the conclusions of her accountant and the accountant neither audited nor attempted to verify the documents he relied upon in reaching these conclusions.
Fail to report a foreign bank account? The penalty can be costly. In Letantia Bussell (U.S. Court of Appeals, Ninth Circuit) the IRS assessed an approximately $1.2 million penalty against the defendant-appellant for failing to disclose her financial interests in an overseas account on her 2006 tax return. She did not pay the penalty, and the government filed suit. She previously had been criminally charged for concealing financial assets in 2002. On appeal, the defendant admitted that she willfully failed to disclose her financial interests in her overseas account on her 2006 tax return, but she raises several arguments seeking reversal of the district court's summary judgment ruling. The first argument was that the penalty violated the Eight Amendment Excessive Fines Clause. The Court found the assessment against her was not grossly disproportional to the harm she casued because she defrauded the government and reduce public revenues. The Court allowed the penalty. (Unpublished opinion affirming an unpublished D.C. California decision.)
Liquidating stocks for a purchase? . . . If you've got to liquidate some of your portfolio to make the downpayment on a property, don't wait till the last minute. The lender will check on where the downpayment is coming from. Cash in the bank carries more weight than stocks in a portfolio. The lender is likely to see the value of the portfolio as a percentage (e.g., 70%) of cash--and they won't put a higher value on it simply because you've got a bunch of blue chips. You want to have your finances in order to avoid any questions. Another point, liquidating at the last minute could mean holding up the closing. And don't forget to factor in the tax you'll have to pay on the gain. You may want to sell additional stock to have the funds to pay the tax.
November 6, 2017
NewsThe IRS has reported it has not yet announced a date that it will begin accepting individual tax returns for the 2018 tax filing season. At the present time, the IRS is continuing to update its programming and processing systems for 2018. In addition, the IRS continues to closely monitor potential legislation that could affect the 2018 tax season, including a number of “extender” tax provisions that expired at the end of 2016 that could potentially be renewed for tax year 2017 by Congress. The IRS anticipates it will not be at a point to announce a filing season start date until later in the calendar year. The IRS will continue to work closely with the nation’s tax professionals and software community as preparations continue for the 2018 tax filing season. Speculation on the Internet that the IRS will begin accepting tax returns on Jan. 22 or after the Martin Luther King Jr. Day holiday in January is inaccurate and misleading; no such date has been set.
The IRS has announced nonacquiescence (AOD-2017-7) to the holding in Carol A. and Roy E. Stanley (U.S. District Court, W.D. Arkansas) where the Court held the taxpayers' income was nonpassive rather than passive. The IRS objected to the court's holding that implied mere possession of a sotck certificate constituted ownership for purposes of Sec. 469(c)(7) for meeting the 5% ownership requirements to qualify as a real estate professional. In addition, the IRS took issued with the holding that allowed grouping rental real estate activities with an adjacent golf course.
Tip of the DayEstimated taxes . . . The IRS is warning individuals that some 10 million taxpayers were subject to the estimated tax penalty last year. If you regularly make estimated payments you should be aware of the requirements. But the requirement can arise because of a change in your tax status. There are two ways to satisfy the requirement. Either pay in as much as last year's liability (110% for high income taxpayers) on the return, or compute your income and tax liability for the current year on a quarterly basis. You can fullfill the requirements either by withholdings or making estimated payments. To avoid a penalty the payments must be made equally in the four quarters or based upon your income for the quarter. If you're unfamiliar with the rules, talk to your tax advisor.
November 3, 2017
NewsThe House has released its draft version of the "Tax Cuts and Jobs Act". We'll provide the highlights below and provide more detail shortly. Keep in mind that this is only the House version. The Senate is expected to produce its own version and the differences will be ironed out in a conference committee. Some of the provisions are sure to spark the ire of industry groups, Representatives and Senators who are seeing it for the first time, etc. The highlights include:
In addition to the above, the law would make a number of other modifications to foreign income and the rules with respect to exempt organizations.
We're working on a more detailed analysis of the parts of the new law of most interest.
November 2, 2017
NewsThe IRS is reminding taxpayers with expiring Individual Taxpayer Identification Numbers (ITINs) to submit their renewal applications as soon as possible. Failing to renew them by the end of the year will cause refund and processing delays in 2018. The IRS has mailed more than 1 million letters to taxpayer households that include an ITIN holder with middle digits 70, 71, 72 or 80. Affected taxpayers who expect to file a tax return in 2018 should submit a renewal application now.
Those eBay sales don't escape tax. In Thomas R. Huzella et ux. (T.C. Memo. 2017-210) the Court sided with the IRS in finding the taxpayer had unreported income from online sales. The taxpayer failed to file a schedule C and reported none of the income. The gross receipts were reported to the taxpayer and the IRS by PayPal, Inc. on Form 1099-K, Payment Card and Third Party Network Transactions. The income was generated from buying and selling coins and related items (silver ingots). The taxpayer had been collecting coins since 1958 and obtained some of the coins from his father who was also a collector. As a result he had no records to establish his basis in the coins. Because the taxpayer failed to maintain adequate records, the Court allowed the Cohan rule to determine the cost of goods sold, postage, and packing fees.
If you fail to file a return the IRS can file a Substitute For Return (SFR) using the information it has available on income and take the standard deduction. That's what it did in the case of Steven R. Rader (T.C. Memo. 2017-209). The taxpayer had unreported self-employment income. The IRS used the gross income to compute his taxable income, making no provision for any deductions associated with the self-employment income. The Court held the IRS's SFR was valid both in form and under the law. The Court also allowed the IRS's imposition of the failure to file and failure to pay penalties and a failure to make estimated tax payments penalty. Finally, since this wasn't the taxpayer's first time maintaining frivolous or groundless tax positions, the Court imposed a $2,000 penalty under Sec. 6673(a)(1).
Tip of the DayNew employee cost . . . What does it cost to get a new employee? There are a number of factors to consider, but before you assume you can quickly find someone to fill the job consider the cost to hire and train the employee. Even if he's highly qualified, there's an adjustment period when a worker is not fully productive. That obviously various--new hires in some positions may be up to speed in a day or week--others can take months. The cost to get a new employee also varies. Sometimes all you need is a sign on the wall on the factory floor, sometimes it can take months of time consuming interviews.
November 1, 2017
NewsThe latest information from the House is the release of the draft of the tax bill has been pushed back one day to this Thursday. It appears that there are two sticking points--the deduction for state and local taxes and the taxation of 401(k) plans. Neither are a surprise.
Notice 2017-67 (IRB 2017-47) provides guidance on the requirements for providing a qualified small employer health reimbursement arrangement (QSEHRA) under section 9831(d) (added to the Code by 21st Century Cures Act (Cures Act)), the tax consequences of the arrangement, and the requirements for providing written notice of the arrangement to eligible employees.
The IRS is reminding taxpayers (IR-2017-183), including those in disaster areas, who want to file a 2016 tax return electronically to do so by Saturday, Nov. 18, 2017. Filing of paper tax returns will remain available after that date. IRS Modernized e-file, the system that processes electronically-filed individual returns, will shut down after Nov. 18 so the agency can perform annual maintenance and to enable the IRS to reprogram the system for the upcoming 2018 tax-filing season. While most individuals have already filed their 2016 federal tax returns, certain taxpayers may qualify for an extension until Jan. 31, 2018. This includes taxpayers who live in a federally declared disaster area, have a U.S. tax filing obligation, and had previously obtained a valid 6-month extension of time to file their federal tax return. The federally declared disaster areas include hurricane and tropical storm victims in Georgia, Florida, Puerto Rico, the Virgin Islands and parts of Texas, Louisiana and South Carolina, as well as wildfire victims in parts of California.
The IRS is providing relief to taxpayers who have been adversely affected by Hurricane Maria and recent wildfires in California (“California Wildfires”) and who have retirement assets in qualified employer plans that they would like to use to alleviate hardships caused by these disasters. In addition, this announcement provides relief from certain verification procedures that may be required under retirement plans with respect to loans and hardship distributions. For additional information see Announcement 2017-15.
Tip of the DayFiling annual reports . . . Chances are if you do business as a corporation (or, in many states an LLC or partnership) you've got to file an annual report with your home state and probably every state in which you do business. In most cases it's exceedingly simple. Put in the names of the officers and directors along with the shares outstanding and cut the state a check. The amount of the check is varies from about $9 (New York, and it's actually every two years) to about $300 (a couple of states go higher based on a scale). In many states you can file electronically. While the dollar amount is insubstantial, you don't want to forget. You could find your corporation dissolved by proclamation. Set up a reminder. If you have your tax return prepared by your accountant, chances are he can file the report for your home state along with the tax return.
October 31, 2017
NewsAt this time it's still expected that the House will release its version of draft tax reform legislation on November 1. The final House version is planned to be released before Thanksgiving. The Senate is anticipated to announced its version sometime during the week of November 13.
The IRS has announced that most user applications for e-File, Transcript Delivery Systems and the AIR Transmitter Control Code are now available. The transition of e-Services to a new platform was completed the weekend of the 28th. This technology upgrade will mean an improved look and feel to the applications. All users except for state users may now submit new or change existing applications. The IRS also has added additional personnel to the e-Help Desk to assist with applications questions and processing. The IRS also announced that the move of e-Services to a new identity proofing process called Secure Access currently is on hold while the IRS reviews vendor options.
Tip of the DayEarly distributions from SIMPLE plans . . . SIMPLE plans are just that; simple. They allow employees to defer up to $12,500 (2018 amount) to a special IRA. The amount deferred escapes current income tax (but not FICA or medicare taxes). Employees age 50 and older may make annual "catch-up" contributions of $3,000 (2018 amount). And Most of the IRA rules apply. Thus, unlike a 401(k) plan you can't borrow from a SIMPLE. Distributions before age 59-1/2 are subject to a 10% penalty, unless one of the exceptions applies. There's a trap here. Distributions during the first two years of participation in a SIMPLE plan are subject to a 25% (instead of 10%) penalty. That includes rollovers from a SIMPLE IRA to a non-SIMPLE IRA.
October 30, 2017
NewsThe IRS has provided an update on critical issues currently affecting e-Services users. Because it is still reviewing its contract options for an identity-proofing vendor, the move of e-Services to Secure Access authentication is delayed. The transition was originally planned for later this month. IRS will communicate as soon as a new launch date is set. The technology upgrade involving the move of e-Services to a new platform continues. This means tax professionals are unable to take certain actions, like requesting an EFIN, or viewing or updating an application. Once the applications become available, IRS will make additional personnel available for the e-Help Desk to assist tax pros and process requests and applications.
Notice 2017-68 (IRB 2017-46) announces that obligations of a United States person received in exchange for certain property that was located in an area designated by FEMA as subject to damage from Hurricane Irma or Hurricane Maria will be considered to qualify for the exception from United States property in Section 956(c)(2)(C) and Reg. Sec. 1.956-2(b)(1)(v) if repaid by March 31, 2018.
Tip of the DayReverse mentoring . . . The idea behind mentoring has always been senior employees teaching junior ones. But senior employees can often learn from their juniors. That's especially true in certain technical fields where the science is always changing. Employees with advanced degrees may have just left school after doing cutting edge research. And in even nontechnical jobs younger employees are often much more adept at using the latest technology.
October 27, 2017
NewsThe IRS has issued a number of corrections to the final and temporary regulations (T.D. 9815) dealing with Reg. Sec. 1.871-15, 1.871-15T, 1.1441-1, 1.1441-2, 1.1441-7, and 1.1461-1 which affect foreign persons that hold certain financial products providing for payments that are contingent upon or determined by reference to U.S. source dividends, as well withholding agents with respect to dividend equivalents and certain other parties to section 871(m) transactions and their agents.
In Wendell C. Robinson and May T. Jung-Robinson (T.C. Memo. 2017-207) the taxpayers argued that because the IRS did not send them a statutory notice of deficiency notifying them that they owed money, the government is prevented from collecting it. The Tax Court noted that, in general Section 6213(a) restricts the IRS from assessing or taking action to collect any deficiency in tax until after it has mailed the taxpayer a statutory notice of deficiency, Section 6213(b)(1) provides an exception for assessments arising out of the taxpayer's mathematical or clerical errors. The IRS need not issue a statutory notice before assessing a tax when a “taxpayer is notified that, on account of a mathematical or clerical error appearing on the return, an amount of tax in excess of that shown on the return is due, and that an assessment of the tax has been or will be made on the basis of what would have been the correct amount of tax but for the mathematical or clerical error”. The Court held the IRS could collect the tax.
If you filed as married, separate, you can't elect to file a joint return after a notice of deficiency has been mailed to either spouse. But that wasn't the case in Patricia Marie Knez (T.C. Memo. 2017-205) the taxpayer was married yet filed a return as head-of-household, an option that wasn't available to her. As a result, the Tax Court held that erroneous filing didn't prevent her from electing to file a joint return.Tip of the Day Dividends contructively received . . . You can't delay the receipt of income by just not cashing a check. It's called constructive receipt of income. But that rule applies in a number of situations. In a letter ruling a corporation declared several dividends. The first was paid in the year declared; the others weren't paid until a later year. The corporation was solvent and had sufficient assets to pay the dividends and there was sufficient earnings and profits. The IRS ruled that the dividends were income in the year they were declared, not when paid in a later year. Note. Letter rulings can't be cited as precedent, except by the taxpayer who taxpayer requesting it.
October 26, 2017
NewsWhile there's still no news from Congress on the provisions of the tax bill, Speaker Paul Ryan (R-Wis) reported that the tax legislation will be unveiled sometime during the week of October 30.
The IRS has posted a new webpage Online Courses Help Charities Understand Tax Issues to help charities better understand tax issues that affect tax exempt organizations. It offers courses on a wide range of topics that can help these organizations obtain and maintain their tax-exempt status. The online courses average less than 30 minutes. There is information to help guide an organization through the application process. They can also find courses that cover how to fully meet annual filing requirements. Aside from 501(c)(3)s, there are also courses geared to other 501 organizations, including veterans organizations, social clubs and fraternal organizations.
Victims of Tropical Storm Harvey that took place beginning on Aug. 27, 2017 in parts of Louisiana may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of Louisiana. Following the recent disaster declaration issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Louisiana will receive tax relief. Individuals who reside or have a business in Acadia, Allen, Assumption, Beauregard, Calcasieu, Cameron, DeSoto, Iberia, Jefferson Davis, Lafayette, Lafourche, Natchitoches, Plaquemines, Rapides, Red River, Sabine, St. Charles, St. Mary, Vermilion and Vernon Parishes may qualify for tax relief. For complete details, go to Tax Relief for Victims of Tropical Storm Harvey in Louisiana.
In John Moriarty and Cassandra Moriarty (T.C. Memo. 2017-204) the Tax Court found that the IRS settlement officer did not abuse her discretion in sustaining a levy because the taxpayers rejected a full-pay installment agreement which the IRS would have allowed, instead offering to pay only half over six years. The Court noted that secondary school and college tuition is a “conditional” expense that may in some circumstances be allowed in evaluating a collection alternative. But for such expenses to be allowable, the taxpayer must establish that he will discharge his entire unpaid tax liability within six years.
Tip of the DayValue of warranty varies . . . Before you assume you've got nothing to worry about because the product or service comes with a warranty, read the fine print. Parts and labor may be covered for the first 90 days, then parts only for the next two years. That may not mean much if labor usually makes up 80% of the cost of repairs. Or there may be so many exclusions, most failures aren't covered under the warranty. In some cases only a small portion of the unit may be excluded, but it's the one most prone to breakdowns--and the most expensive to fix. In some cases your only recourse is to receive a comparable, rebuilt unit. Or, for some items subject to wear, such as tires, prorated credit toward the same make and model. And the warranty won't have much value if you leave the product in the garage until it's mostly expired.
October 25, 2017
NewsVictims of Hurricane Irma that took place beginning on Sept. 6, 2017 in parts of South Carolina may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of South Carolina. Following the recent disaster declaration issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in South Carolina will receive tax relief. Individuals who reside or have a business in Allendale, Anderson, Bamberg, Barnwell, Beaufort, Berkeley, Charleston, Colleton, Dorchester, Edgefield, Georgetown, Hampton, Jasper, McCormick, Oconee, and Pickens Counties may qualify for tax relief, including extended deadlines for filing certain returns. For complete details, go to Tax Relief for Victims of Hurricane Irma in South Carolina.
The IRS has added Orange and Solano to the list of counties in California that qualify for relief from the IRS as a result of wildfires beginning on October 8, 2017. Taxpayers in those counties may deduct them on their 2017 or 2016 tax returns. In addition, taxpayers residing in, or having a business in, those counties may be able to postpone certain filings. For more information go to our article Tax Relief for California Wildfire Victims.
It's not usual for a business to use several entities to conduct its affairs. The simplest example is one entity owning a warehouse and renting it to another entity that operates a distribution business. There are often valid business reasons for doing so. But the IRS can challenge intercompany transactions if they are not arm's-length transactions. Not infrequently, a management company is set up to oversee the workings of operating companies and charging a management fee for its services. That was the case in Jeffrey Wycoff and Merrie Pisanno-Wycoff (T.C. Memo. 2017-203). The IRS challenged the fees charged by the management company. The Court sided with the IRS in finding that the fees charged by the management company were excessive. The Court heard expert testimony regarding the value of the services provided by the management company and determined the management fee deductions for the operating companies for the years at issue.
Tip of the DayTell your accountant about all asset dispositions . . . When doing your business return your accountant may uncover sales of business assets if you've shown the revenue separately in your records. But he probably won't find them if you disposed of them in other ways such as scrapping them. Assets that have been sold may produce a gain or a loss, but if an asset is scrapped there's a good chance you'll have a deductible loss. If the assets are located in a state with a personal property tax, they might be included on the rolls and continue to be taxed if they're not taken off the books.
October 24, 2017
NewsThe IRS and the Treasury Department has published it's initial verios of the 2017-2018 Priority Guidance Plan. The 2017-2018 Priority Guidance Plan contains guidance projects that the IRS hopes to complete during the twelve-month period from July 1, 2017, through June 30, 2018 (the plan year).
FinCEN has announced that California wildfire victims in affected areas of California have until January 31, 2018, to file their Report of Foreign Bank and Financial Accounts (FBAR) report for the 2016 calendar year. FinCEN is now offering this expanded relief to any area designated by the Federal Emergency Management Agency (FEMA) as qualifying for individual assistance or public assistance. Currently, nine counties in California are eligible for individual assistance or public assistance: Butte, Lake, Mendocino, Napa, Nevada, Orange, Solano, Sonoma, and Yuba. Should FBAR filers in other localities affected by the California wildfires be deemed eligible for individual assistance or public assistance at a later date, they will automatically receive the same filing relief. The FBAR for calendar year 2016 would otherwise have been due October 15, 2017.
It appears they'll be a fourth, higher tax rate, in the proposed new tax law. House Speaker Paul Ryan (R-Wis.) indicated a rate above the currently proposed top rate of 35%, but did not mention an actual amount. The other rates currently under consideration are 12, 25, and 35 percent.
Taking a loan from your pension plan at work can make sense in certain situations, but there are traps. In Joseph E. Bormet (T.C. Memo. 2017-201) the taxpayer did just that. He made payments on the loan while he was working but failed to do so when he went on disability. Failure to make repayments resulted in the outstanding balance being considered a distribution. The Tax Court found the taxpayer had some $26,900 of income as a result of the nonpayment. The Court also found the taxpayer liable for the 10% additional tax on early distributions.
Tip of the DayTrading work hours . . . Whenever a wage and hours question pops up, it's best to get advice from your state labor department or a labor law professional. One employer gave nonexempt workers paid time off to deal with a snowstorm. He later asked them to work an equal amount of time for free to make up for the time off. The state said the employer had to pay the employees for any time worked. The paid time off couldn't be used to offset time worked.
October 23, 2017
NewsOn February 23, 2016, the Department of the Treasury and the IRS published a notice of proposed rulemaking (81 FR 8870) that defines political subdivision for purposes of tax-exempt bonds under Section 103 of the Internal Revenue Code. Based on comments received, that the law was long-settled and that the proposed regulations could create doubt as to numerous existing issuers, the IRS hass announced it is withdrawing the notice of proposed rulemaking (REG-129067-15).
Work related education courses are deductible as an miscellaneous itemized deduction, but not if they qualify you for a new trade or business. The education courses must just maintain or improve skills required by the individual in his employment or other trade or business or meet the expess requirements of the individual's employer or the requirements of applicable law or regulations. The IRS has strictly interpreted this. In an earlier case it held CPA review courses that an accountant took so he could pass the CPA exam didn't qualify. In Jerry John Czarnecki (U.S. Court of Federal Claims) the taxpayer was an engineer with a professional license and a Master's degree in applied mathematics who was employed an enrolled in a Ph.D. program in structural engineering. The Court noted it was undisputed the taxpayer had no obligation to pursue continuing education to maintain his professional license until after he held his license for three years. The Court also found the studies would lead to qualifying him for a new trade or business. The Court denied the taxpayer's claim for a refund.
Tip of the DayMall tenants move out? . . . When you decide to rent space in a mall, there's a good chance you selected the site based on anchor tenants or other tenants with names that draw traffic. If those tenants move out, or if the mall is more than a certain percentage vacant, you may be entitled to a rent decrease or some other offset. The first step is to check your lease carefully. If there's no clause that provides for that, talk to a real estate attorney. You still may have some recourse. If you're getting ready to sign a lease, make sure you have an out should this happen.
Copyright 2017 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