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IRS Written Determinations
February 8, 2010
News
The IRS has released the 2010 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws. Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 80-page document, The Truth about Frivolous Tax Arguments. Highlights include cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes and injunctions against preparers and promoters of false fuel tax credit schemes.
Revenue Procedure 2010-17 (IRB 2010-8) provides guidance to individuals who fail to meet the eligibility requirements of Section 911(d)(1) because adverse conditions in a foreign country preclude the individuals from meeting those requirements. A current list of the countries for tax year 2009 and the dates those countries are subject to the Section 911(d)(4) waiver is provided.
In Sivatharan Natkunanathan (T.C. Memo. 2010-15) the IRS determined a deficiency and an addition to tax under Sec. 6651(a)(1) for failure to file on time. In response, the taxpayer claimed a qualified business stock exclusion under Sec. 1202, deductions for uncollected software development invoices under Sec. 165 as business losses or, alternatively, under Sec. 166, as bad debt losses, and deductions for meals and entertainment, advertisement, rent, and utilities expenses under Sec. 162. The Tax Court held the taxpayer could not claim a Sec. 1202 qualified business stock exclusion to shield from tax any part of the proceeds from the sale of stock acquired upon exercise of employee stock options where the taxpayer has not established that either the options or the stock constituted qualified small business stock within the meaning of Sec. 1202. The Court also held the taxpayer could not deduct billed and unreceived amounts that have not been previously included in income. The Court also held the taxpayer could not deduct as business expenses meals and entertainment, advertisement, rent, and utilities expenditures that are substantiated solely by a log of such expenditures and in the absence of any primary evidence (receipt, proof of payment, invoices, etc.) of having made such expenditures.
Tip of the Day
Home security system . . . It's not deductible as a miscellaneous itemized deduction on Schedule A, but you may be able to deduct a percentage of the cost if you use a portion of your home for business.
February 5, 2010
News
The hiring tax credit of $5,000 proposed by President Obama may have support in the Senate, but House Democrats are less enthusiastic. Hopefully, resolution of differences will come sooner rather than later.
The IRS has posted to its Web site at www.irs.gov/taxpros/article/0,,id=218611,00.html a list of frequently asked questions relating to the proposed new requirements for tax return preparers. The posting includes new questions (dated February 2, 2010) and prior questions posted January 22, 2010. The posting makes it clear that the only preparers that can avoid competency testing are attorneys, CPAs, licensed public accountants (in specified states) and enrolled agents who are active and in good standing.
Tip of the Day
Bonds bought and sold between interest dates . . . If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. You must report that part of the sales price as interest income for the year of sale. If you buy a bond between interest dates, part of the purchase price represents interest accrued before the date of purchase. When that interest is paid to you, you should treat it as a return of your capital investment rather than interest income by reducing your basis in the bond.
February 4, 2010
News
When the shareholder of a corporation wants to sell the business he prefers to sell the stock to secure long-term capital gain treatment. The buyer, on the other hand, wants to purchase assets to get a step-up in basis so that the purchase price can be quickly written off in the form of depreciation and amortization. In Enbridge Energy Company Inc. (2009-2 USTC 50,737; U.S. Court of Appeals, 5th Circuit) the Court upheld a District Court decision that a transaction was an abusive tax shelter. A corporation's sole shareholder sold his stock to an intermediary, a shell corporation with no business purpose, who borrowed the funds for the acquisition from the final buyer. Immediately thereafter, a buyer purchased the corporation's assets with a step-up in basis.
The IRS can issue a third-party summons to secure records from a bank or other party you've had transactions with. You can file suit to quash the summons. In Oliver Wang, et al. (2009-2 USTC 50,744; U.S. District Court, West. Dist. Wash.) the IRS issued summonses to warehouse club seeking documents regarding business transactions between the company and the taxpayers. Despite the fact the IRS requested records for five years and the taxpayers were under audit for only one year, the Court refused to quash the summons finding the investigation was for a legitimate purpose, that the documents being requested were relevant to the audit and the summonses were not overbroad.
Tip of the Day
New forms for 2009 return . . . There are two new forms this year. One, Schedule M, Making Work Pay and Government Retiree Credits, may give you a $400 credit ($800). The credit isn't available to higher income individuals and you generally must have earned income. If you use tax preparation software, the program should handle all the details. The second form is Schedule L, Standard Deduction for Certain Filers. If you're taking the standard deduction you can increase it by the amount of your real estate taxes, new motor vehicle taxes, or a net disaster loss. This one is easier to miss, but the savings can be significant.
February 3, 2010
News
Notice 2010-19 (IRB 2010-7) applies to taxpayers making gifts in trust during 2010. Under section 2511(c), a transfer of property to a non-wholly-owned grantor trust is a transfer by gift of the entire interest in the property. To determine whether a transfer to a wholly-owned grantor trust constitutes a gift, the gift tax provisions in effect prior to 2010 apply.
Under President Obama's proposed budget the IRS will get a increase in funding for enforcement (with a significant part of the increase for combating offshore tax evasion and high wealth taxpayers), taxpayer service, and technology improvements. The budget provides nearly $250 million in new enforcement initiatives to improve compliance. The technology improvements are aimed at completing development of the new taxpayer account database and to update the electronic filing system. Some of the enforcement money will be going to increase staff in that area.
Tip of the Day
Safe deposit box rent . . . Chances are you won't be able to meet the 2% threshold for deducting miscellaneous itemized deductions, but if you do you may be able to add safe deposit box rent. But in order to qualify, the box must be used to store taxable income-producing stocks, bonds, or investment-related papers and documents. You cannot deduct the box rent if you use it only for jewelry, tax-exempt securities, your will, or documents related to your personal residence.
February 2, 2010
News
The Department of the Treasury has released a Greenbook, the General Explanations of the Administration's Fiscal Year 2011 Revenue Proposals. The proposals include extending the tax cuts that expired at the end of 2009 including the increased expense option and bonus depreciation and expanding the earned income tax credit and the child and dependent care tax credit. However, the proposed budget eliminates a number of oil and coal incentives and raises the tax rates on upper-income taxpayers. We'll be posting a list of the provisions. For the complete document go to www.treas.gov/offices/tax-policy/library/greenbk10.pdf.
The IRS is issuing temporary (REG-120692-09) and interim final (T.D. 9479) regulations under the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA). MHPAEA prohibits group health plans providing mental health or substance use disorder benefits along with medical/surgical benefits from imposing more restrictive financial requirements or treatment limitations with respect to the mental health or substance use disorder benefits than the predominant ones imposed with respect to substantially all medical/surgical benefits. The IRS is issuing the temporary regulations at the same time that the Employee Benefits Security Administration of the U.S. Department of Labor and the Centers for Medicare & Medicaid Services of the U.S. Department of Health and Human Services are issuing substantially similar interim final regulations with respect to MHPAEA for group health plans and issuers of health insurance coverage offered in connection with a group health plan under the Employee Retirement Income Security Act of 1974 and the Public Health Service Act. The temporary regulations provide guidance to employers and group health plans relating to the group health plan mental health and substance use disorder parity requirements.
Tip of the Day
Not all banks out of woods yet . . . While the biggest banks seem to be on the mend, the crisis may not have fully hit home yet at regional and some local banks. Regional banks may feel the impact of commercial loans. And there are still plenty of banks on the FDIC's watch list. (However, many small, local banks never left their conservative roots and are in good shape.) It still pays to watch your bank balances so they don't exceed the FDIC limit. And if you're in the processing of getting a loan, don't commit to spending the money until the funds are in your account. Finally, no matter how sure things look, always have a plan B.
February 1, 2010
News
The IRS has announced (IR-2010-16) that some taxpayers who file paper income tax returns will send them to different processing centers this year. Taxpayers in Maine, Maryland, Massachusetts, New Hampshire, Vermont, Virginia and the District of Columbia will now send their tax returns to the IRS Kansas City Service Center in Kansas City, Mo. Taxpayers in Indiana and Michigan will send their tax returns to the IRS Fresno Service Center, in Fresno, Calif. Taxpayers in Alabama will send their tax returns to the IRS Austin Service Center in Austin, Texas. The IRS continuously monitors work flow at its centers and makes appropriate adjustments by altering the volume of returns to be sent to each. For taxpayers who file paper returns, the correct center addresses are on labels inside the tax packages they receive in the mail. Taxpayers who do not receive a package and need the service center address should refer to the back cover of the instructions to Form 1040, Form 1040A and Form 1040EZ.
Tip of the Day
Hold off hiring and raises . . . That doesn't mean you shouldn't hire necessary staff, but you might want to put off any noncritical hires until there's more information on the President's small business jobs and wages incentive. The proposed tax credit would apply to net new hires (and salary increases above the inflation level). The question is from when--the date legislation is passed, from January 1, 2010, or from some other date? Hopefully, Congress will take action quickly. But, as always, business demands should take precedence over tax benefits.
January 29, 2010
News
In order to claim a travel expense deduction, a taxpayer must show that his expenses are ordinary and necessary, that he was away from home when he incurred the expense, and that the expense was incurred in pursuit of a trade or business. You must satisfy all three requirements. In James M. Minick et ux. (T.C. Memo. 2010-12) the taxpayer worked at various jobsites outside the area of his home because he could not find work nearby. Under Section 162, the term "'home' does not have its usual and ordinary meaning." This Court has interpreted a taxpayer's "home" under Section 162 to mean his principal place of employment and not where his personal residence is located. The Court must consider the "away from home" requirement "in light of the further requirement that the expense be the result of business exigencies". Where a taxpayer's principal place of employment is other than his residence and he chooses not to move his residence for personal reasons, his additional living and travel expenses are a result of that personal choice. Such personal expenditures cannot be deemed ordinary and necessary business expenses. An exception to the general rule does exist. A taxpayer may claim his personal residence as his home in situations where the taxpayer is away from his home on a temporary, rather than indefinite or permanent basis. If a taxpayer cannot show that he had both a permanent and temporary abode for business purposes during the year at issue, he is not entitled to the deduction. But this exception does not apply if the taxpayer has no tax home. An individual may be considered as an itinerant for purposes of section 162 if that individual has neither a principal place of business nor a place he resides permanently. The Court found that there was no business reason for the taxpayer tax home to be where he claimed his home to be. Indeed, the taxpayers had no business reason for maintaining the residence, there were no business ties to the residence. Thus, any duplicate living expenses were attributable to the taxpayers' personal choice and not dictated by the exigencies or demands of the taxpayer's business. The Court sided with the IRS finding the taxpayer was not "away from home" during the time at issue.
In Daryl Maassen et al. (2009-2 USTC 50,731; U.S. District court, No. Dist. Iowa, West. Div.) the Court held that the taxpayer could not recover his legal fees for an improper collection action by the IRS. The Court held the provision only applies to levies under Sec. 6331. The Court noted the seizure of the taxpayer's property was not an administrative seizure, but as a result of a foreclosure and sale.
Want to claim the Work Opportunity tax credit? The individual you're hiring has to certified by a state agency within the required certification period. In Manor Care, Inc. (2009-2 USTC 50,725; U.S. Court of Federal Claims) the Court dismissed the taxpayer's argument the individuals were automatically members of the targeted group because a request for certification had been made.
Tip of the Day
Repayments of income . . . If you repay an amount that you included in income in an earlier year, you may be able to deduct on Schedule A the amount you repaid. If the amount repaid was ordinary income of $3,000 or less, the deduction is subject to the 2% limit. If the amount is more than $3,000 and at the time you included the amount in income, you thought you had an unrestricted right to it, you may be deduct it under the claim of right rule.
January 28, 2010
News
Revenue Procedure 2010-15 (IRB 2010-7) updates Rev. Proc. 2008-14, and identifies circumstances under which the disclosure on a taxpayer's income tax return with respect to an item or a position is adequate for purpose of reducing the understatement of income tax under Section 6662(d); (relating to the substantial understatement aspect of the accuracy-related penalty), and for the purpose of avoiding the tax return preparer penalty under Section 6694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns.
In Anonymous (134 T.C. No. 2) the taxpayer requested a private letter ruling (PLR) from the IRS. The IRS informed the taxpayer that he would be issuing a PLR adverse to his interests. The taxpayer declined to withdraw the request for a PLR. Before the IRS publicly released the PLR, the taxpayer petitioned the Tax Court, alleging that the PLR was arbitrary and capricious and that the IRS failed to delete certain terms in the PLR that tended to identify the taxpayer. The taxpayer asked the Court to order the IRS not to disclose the PLR or, in the alternative, order the Service to delete certain terms from the PLR. The IRS moved for summary judgment and argued that the Court lacked jurisdiction to prevent it from disclosing the PLR at issue and that none of the terms in the PLR would tend to identify the taxpayer. The Court held that its jurisdiction is limited to making a determination with respect to whether certain terms in the PLR are required to be deleted before publication. Therefore, it granted the IRS's motion for summary judgment in part. The Court further held that because a question of fact remained whether certain terms in the PLR tended to identify the taxpayer, it denied the IRS's motion for summary judgment in part.
Tip of the Day
First-time homebuyer credit and related parties . . . A taxpayer who purchases a home from certain related parties is not eligible for the first-time homebuyer credit. The purchase of a home from the taxpayer's parents would not qualify. Related persons also include an executor of an estate and a beneficiary of the estate, except for a sale or exchange that satisfies a pecuniary bequest (Sections 36(c) and 267(b)(13) of the Code).
January 27, 2010
News
Announcement 2010-09 (IRB 2010-7) explains the potential content of a schedule that will require certain business taxpayers to report uncertain tax positions on their tax returns and invites public comments on the Internal Revenue Service’s approach.
In an IRS memorandum (SBSE-05-0110-004) the IRS has re-issued the procedures outlined in Interim Guidance Memorandum, SB/SE-05-0209-006, Interim Guidance for Additional Review of Real Property Valuations in Offer in Compromise Cases. The IRS noted that during these current economic times the value of real property may be difficult to determine in specific markets and is frequently an area of dispute in the computation of reasonable collection potential. The purpose of the additional review is to confirm the value of the real property and ensure that the reasonable collection potential has been properly determined. These procedures are meant to supplement; not replace, the financial analysis and review provisions of the Internal Revenue Manual.
IRS memorandum SBSE-05-0110-003 reissues interim guidance dated February 2, 2009 with control number SB/SE-05-0209-007 titled, Interim Guidance for an Offer to Compromise an Accepted Offer. This interim guidance memorandum provides procedures for working an offer to compromise an accepted offer.
Tip of the Day
Insulated vinyl siding not qualified for energy credit . . . Not all insulation products automatically qualify for the energy credit. The IRS has held that because insulated siding provides structural support or a finished surface, it fails the statutory requirement that an insulation material or system must be specifically and primarily designed to reduce heat loss or gain of a dwelling unit. The statutory requirement that the insulation material or system must be specifically and primarily designed to reduce heat loss or gain applies to the component the homeowner purchased. This component is the vinyl siding, not a portion of cost of the siding that serves an insulation function. (See IRS Notice 2009-53, 2006-26, 2006-53, and 2006-71.)
January 26, 2010
News
The IRS has announced details of the new law allowing cash contributions made to charities providing earthquake relief in Haiti after January 11, 2010 and before March 1, 2010 to be deducted on a taxpayer's 2009 tax return. Only cash contributions qualify. That includes contributions made by text message, check, credit card or debit card. The contributions must be made specifically for the relief of victims in areas affected by the January 12 earthquake in Haiti. Taxpayers may deduct contributions made in the specified period on either their 2009 or 2010 return. Taxpayers must itemize to get the tax benefit. For donations by text message, a telephone bill will meet the recordkeeping requirements. Keep in mind that contributions to foreign organizations generally do not qualify for a deduction.
The IRS has announced that taxpayers have been selected for the initial round of the audit under the National Research Program for employment tax issues. Small businesses are expected to comprise about 80% of the total selected. If you have been selected for the audit, you will probably receive a letter in February or March. Some 6,000 businesses will be selected at random. Topics to be reviewed include deferred compensation, backup withholding, executive compensation, fringe benefits, and Forms 1099.
Tip of the Day
Text of letter to tax return preparers . . . Earlier this month the IRS has released a copy of the letter it's mailing to selected tax return preparers informing them of their responsibilities with respect to the filing of an accurate return. In the case of a Schedule C return preparers must ask sufficient questions and review sufficient taxpayer records to determine that income and expenses reported are correct and complete. Gross receipts must be fully reported. Taxpayers should provide books and records to substantiate the fact they are conducting a business and the gross income received during the year, or you must receive sufficient information in the form of other documentation which enables you to reconstruct their income. Expenses claimed for the business must be ordinary and necessary for that type of business. Taxpayers should provide books and records to substantiate Schedule C expenses. You can find the full text of the letter on the IRS Web site at www.irs.gov/taxpros/article/0,,id=217946,00.html.
January 25, 2010
News
The IRS has released updates of the following publications:
Unrecovered investment in annuity . . . If a retiree contributed to the cost of an annuity, he or she can exclude from income a part of each payment as a tax-free return of your investment. If the retiree dies before the entire investment is recovered tax free, any unrecovered investment can be deducted on their final income tax return.
January 22, 2010
News
The House has unanimously passed bipartisan legislation that would let taxpayers accelerate deductions for cash donations to Haitian earthquake relief into 2009. Identical language is contained in a Senate bill. The provision permits taxpayers to treat charitable contributions of cash made after January 11, 2010, and before March 1, 2010, as contributions made on December 31, 2009, if such contributions were for the purpose of providing relief to victims in areas affected by the earthquake in Haiti that occurred on January 12, 2010. Thus, the effect of the provision is to give calendar-year taxpayers who make Haitian earthquake-related charitable contributions of cash after January 11, 2010, and before March 1, 2010, the opportunity to accelerate their tax benefit. Under the provision, such taxpayers may realize the tax benefit of such contributions by taking a deduction on their 2009 tax return. The provision also clarifies the recordkeeping requirement for monetary contributions eligible for the accelerated income tax benefits described above. With respect to such contributions, a telephone bill will also satisfy the recordkeeping requirement if it shows the name of the donee organization, the date of the contribution, and the amount of the contribution. Thus, for example, in the case of a charitable contribution made by text message and chargeable to a telephone or wireless account, a bill from the telecommunications company containing the relevant information will satisfy the recordkeeping requirement.
In Shelby L. Jordan et ux. (134 T.C. No. 1) the wife signed a Form 900, Tax Collection Waiver, containing a waiver extending the 10-year period of limitations on collection for the first 4 of the tax years in issue. After signing the waiver, the taxpayers entered into an installment agreement with the IRS. Although the husband's signature purportedly appears on the Form 900, he contended that he never signed the Form 900 and, therefore, the waiver is invalid as to both taxpayers. The IRS contended that the husband signed the waiver and that, if he did not sign the waiver, the waiver is nevertheless valid as to both taxpayers. The taxpayers also contend that the IRS failed to send them a notice of deficiency for the tax years in issue. The Court held that Adler, which delineates the parties' respective burdens of production and proof regarding the 3-year period of limitations on assessment under Sec. 6501(c)(4), also applies to cases involving the 10-year period of limitations on collection under Sec. 6502(a)(1). The Court also held that the wife may separately enter into a valid waiver of the 10-year period of limitations on collection for tax years for which she has filed a joint tax return, and the waiver is valid as to her. The waiver, however, is not valid as to her husband unless he also signed the Form 900 or unless he may not otherwise repudiate it. The Court also held that because the waiver of the 10-year period of limitations on collection is a dispute regarding the underlying liability, it would review de novo the issue of whether the husband's signature on the Form 900 is authentic. The Court also held that the taxpayers did not meet their burden of proving that the husband did not sign the Form 900. Finally, the Court held that regardless of the authenticity of the husband's signature, he may not repudiate the waiver contained in the Form 900.
Tip of the Day
Have an interest in a foreign corporation? . . . Taxpayers that certain U.S. citizens and U.S. residents who are officers, directors, or shareholders in certain foreign corporations are responsible for filing Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations. The form and attached schedules are used to satisfy the reporting requirements under Sections 6038 and 6046 of the Code. Substantial penalties exist for U.S. citizens and U.S. residents who are liable for filing Form 5471 and who fail to do so.
January 21, 2010
News
In IR-2010-9 the IRS announced the extension of the COBRA health insurance subsidy. Workers who lose their jobs during January and February may qualify for a 65-percent subsidy on their COBRA health insurance premiums, and these newly-eligible individuals, along with those already receiving the subsidy, can now receive it for up to 15 months. Created by the American Recovery and Reinvestment Act of 2009, the COBRA subsidy eligibility period was originally scheduled to expire at the end of 2009, and eligible individuals only qualified for the subsidy for nine months. But the Department of Defense Appropriations Act, 2010, enacted on Dec. 19, extended the eligibility period and the maximum duration of COBRA premium assistance. As a result, workers who are involuntarily terminated from employment between Sept. 1, 2008, and Feb. 28, 2010.
Notice 2010-15 (IRB 2010-6) provides guidance in the form of questions and answers with respect to certain provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (“HEART Act”). The sections of the HEART Act addressed in this notice are section 104 (relating to survivor and disability payments with respect to qualified military service), section 105 (relating to treatment of differential military pay as wages), section 107 (relating to distributions from retirement plans to individuals called to active duty), section 109 (relating to contributions of military death gratuities to Roth IRAs and Coverdell education savings accounts), and section 111 (relating to an employer credit for differential wage payments to employees who are active duty members of the uniformed services).
Amounts received as a settlement agreement for injury are taxable unless the award is for personal physical injury or sickness. In Julie Leigh Domeny (T.C. Memo. 2010-9) the Court noted it first looks to the underlying agreement to determine whether it expressly states the damages compensate for personal physical injury. If the agreement is ambiguous, the Court examines the intent of the payor. In the case at issue the taxpayer had MS (multiple sclerosis) and, as a result of her job, she had a flare up. The doctor instructed her to take two weeks off. On receiving the news, her employer terminated her, which precipitated even more symptoms. The taxpayer's attorney negotiated a settlement with the employer. One of the three settlement payments was reported on a Form 1099-MISC as nonemployee compensation. The Court noted that the differing tax and reporting treatments used for the three payments show the employer was aware that at least part of the taxpayer's recovery may not have been subject to tax. The Court found the taxpayer showed that her work environment exacerbated her existing physical illness. The taxpayer's condition and her MS flareup caused by her working conditions was intense and long lasting. The Court found the taxpayer showed that the only reason for the payment in dispute was to compensate her for her physical injuries.
Tip of the Day
Withholding on real property sales by foreign persons . . . The Foreign Investment in Real Property Tax Act (FIRPTA) requires a FIRPTA withholding tax of 10% of the amount realized on the disposition of all U.S. real property interests by a foreign person. A buyer of U.S. real property interest from a foreign investor is considered the (transferee) and also the withholding agent. The transferee must find out if the transferor is a foreign person. If the transferor is a foreign person and the transferee fails to withhold, the buyer may be held liable for the tax. The seller must report that sale of the real property interests by filing a U.S. Federal Tax Form 1040-NR or Form 1120-F. For more information, go to www.irs.gov/businesses/article/0,,id=184187,00.html.
January 20, 2010
News
Before the IRS files a lien on your property to collect taxes due, the settlement officer must address any relevant issues you raise in the hearing request, including spousal defenses, the appropriateness of the collection action, and any collection alternatives (installment agreement or offer-in-compromise). In Sandra D. Long (T.C. Memo. 2010-7) the settlement officer requested that the taxpayer submit any information regarding alternative collection procedures before the supplemental hearing. The Court noted the taxpayer failed to submit a Form 656 or any updated or other financial information to enable the settlement officer to consider collection alternatives. The Court noted it has repeatedly and consistently held that a settlement officer may sustain a collection action where a taxpayer has failed to provide requested information that would have permitted consideration of collection alternatives. The Court noted that the Internal Revenue Manual states an Appeals officer reviewing collection alternatives should not consider any financial information more than 12 months old. The Court held the IRS did not abuse its discretion in sustaining the lien filing and that the Service could proceed with collection action.
Tip of the Day
Getting a refund? . . . You can now choose to use that money to purchase up to $5,000 in U.S. Series I Savings Bonds. The total amount of saving bonds purchased must be a multiple of $50. Additional money over the specified amount must be deposited into another financial account – such as a checking or savings account. The bonds will be issued in your name. For married taxpayers filing a joint return, the bonds will be issued in the names of both spouses. You normally select this option by filing Form 8888, Direct Deposit of Refund to More Than One Account. For full details read the instructions for the form.
January 19, 2010
News
The IRS has announced (Rev. Proc. 2010-10, IRB 2010-3) the maximum value of employer-provided vehicles first made available to employees for personal use in calendar year 2010 for which the vehicle cents-per-mile valuation rule provided under Section 1.61-21(e) of the regulations may be applicable is $15,300 for a passenger automobile and $16,000 for a truck or van; (2) the maximum value of employer-provided vehicles first made available to employees for personal use in calendar year 2010 for which the fleet-average valuation rule provided under Section 1.61-21(d) of the regulations may be applicable is $20,300 for a passenger automobile and $21,000 for a truck or van. We have updated our Vehicle Tables page to reflect the new data.
A bill will be introduced by House Ways and Means Committee Chairman Charles Rangel that would make cash donations to help the Haiti earthquake victims made after January 11, 2010 but before March 1, 2010 as if such contribution was made on December 31, 2009. That would allow taxpayers making such contributions during that window deductible on their 2009 tax return. Note that only cash contributions would qualify. The measure has bipartisan support and stands a good chance of passage.
FEMA (Federal Emergency Management Agency) has announced that on December 31, 2009 President Obama declared certain areas in New York State affected by Tropical Depression Ida beginning on November 12, 2009 and certain areas in Alabama affected by severe storms and flooding that began on December 12, 2009 eligible for assistance. In addition, a notice issued December 10, 2009 where certain areas in Louisiana were determined to be eligible for relief has been modified. For more information go FEMA 2009 Disaster Declarations.
Tip of the Day
1099 arrival times . . . Most 1099s (and W-2s) have to be in the mail by January 31 (February 1 this year since the 31st is a Sunday). But there's an exception for Form 1099-B, Proceeds From Broker and Barter Exchange Transactions and Form 1099-S, Proceeds from Real Estate Transactions, and, when reporting payments to attorneys or substitute payments by brokers in lieu of dividends or interest, Form 1099-MISC. These forms must generally be in the mail by February 15th. Because the 15th is a Federal holiday, filers will meet the deadline if they furnish the statements by February 16, 2010.
January 15, 2010
News
In Johnny Rosser et ux. et al. (T.C. Memo. 2010-6) the Tax Court denied a deduction for a number of expenditures by the taxpayer's C corporation. The Court found the expenditures to be personal in nature, such as amounts deducted for autos, insurance, and medical expenses. The Court also sided with the IRS in finding the amounts constructive dividends to the taxpayer.
The Ninth Circuit has withdrawn its decision in the Xilinx case. That cased reversed the Tax Court and held that the Service could reallocate the cost of employee stock options so that they would be shared by the taxpayer and a foreign subsidiary. The original decision would put the arm's-length standard in jeopardy in such situations.
Tip of the Day
Avoiding insurance problems . . . Auto, homeowners', business, etc. insurance rates high? There are some simple steps you can take to avoid premium increases, hassles and even cancellation by your carrier. Some things aren't readily under your control, e.g., an auto accident, but you can avoid some at low expense:
January 14, 2010
News
REG-137036-08 contains proposed regulations relating to employment tax liability of agents authorized by the Secretary under Section 3504 to perform acts required of employers with respect to taxes under the Federal Unemployment Tax Act on wages paid for home care services, as defined in these regulations. These proposed regulations affect employers who are home care service recipients, as defined in these regulations, and their designated agents. These regulations also propose amendments to modify the existing regulations under Section 3504 to be consistent with the organizational structure of the IRS, and to update the citation to the Internal Revenue Code of 1986.
In Peter D. Cavaretta et ux. (T.C. Memo. 2010-4) the wife, while working for her husband's dentistry practice, billed insurance companies for work he hadn't done. After she pled guilty to fraud charges, he repaid the money and deducted the restitution as business expenses. The IRS agreed that the repayments are deductible (the taxpayers included the amounts in income when received), but argued that they were restitution, not business expenses. This case was unusual in that both parties agreed that the payments were deductible. The taxpayers said the payments were deductible under Section 162 as a business expense, or under Section 165(c)(1) as a loss incurred in a trade or business, or under Section 1341 as a payment made under a claim of right. The IRS argued instead that the taxpayers can deduct them only under Section 165(c)(2), as losses incurred in a transaction (i.e. fraud) entered into for profit. Lurking behind this dispute is the general rule that a taxpayer usually can't have negative income--if he suffers a very large loss in one year, he may be limited to reporting zero income. But Section 172 allows taxpayers to sometimes claim a net-operating-loss (NOL) carryback. Taxpayers with a big NOL in one year may be able to report zero income in that year and use the remaining loss to offset other years' income, possibly even getting refunds of taxes already paid. But not all losses can be carried back. Section 172(d) says that most nonbusiness deductions, like those under Section 165(c)(2), can be used only to reduce income that isn't from a trade or business and only in the year incurred--they cannot be carried back. The Court had to decide if the payments were business or nonbusiness expenses. The issue turned on whether the restitution was punitive or compensatory. The Court found the restitution payments were ordinary and necessary to the taxpayer's business since the taxpayer would have lost his business had he not settled with the insurance company. (Note that, as in many such situations, the fact pattern was very important in the Court's decision.)
Tip of the Day
Energy credit much enhanced . . . Under prior law, the energy credit was limited in several ways. The American Recovery and Reinvestment Act of 2009 expanded the amount of the credit to $1,500 in total for property placed in service in 2009 and 2010. The credit is equal to 30 percent of the cost of qualifying property. The most frequently encountered qualifying property is insulation or a system designed to prevent heat loss or gain, exterior windows (including skylights), exterior doors, and special metal roofs. Other property includes energy efficient natural gas, propane, or oil fired furnaces or hot water boilers. Make sure that the property is identified by the manufacturer as qualifying (not all property does). Save that information, your invoice, and proof of payment.
January 13, 2010
News
The IRS has unveiled (IR-2010-3) its first redesigned notices that are part of an on-going effort to improve the way it corresponds with taxpayers. The nine new notices are among the first to be reviewed and revised for clarity, effectiveness and efficiency. The agency also will create an office that ensures the effort to improve communications is on-going and permanent. Nine notices that account for approximately 2 million pieces of correspondence with individuals, businesses and exempt organizations will be introduced during January. The new format includes a plain language explanation of the nature of the correspondence, clearly states what action the taxpayer must take and presents a consistent, clean design. The new format also guides taxpayers to appropriate pages on IRS.gov where they can find accurate and relevant information quickly and easily.
It's not unusual for a business to set up another corporation to manage one or more other entities. There can be any number of business reasons for doing so, as well as some legitimate tax reasons. But the management entity must actually perform work, have employees, etc. In Francis J. Vlock et ux. (T.C. Memo. 2010-3) the new entity employed the wife of the owner of the original business, but she did not receive a salary. The new entity paid virtually all of the taxpayers' personal living expenses. The taxpayers created a paper trail that included a "Management Consulting Agreement", "Employment Agreement" etc. The Court found the new entity did not provide services to the taxpayer's insurance business and that payments to the new entity did not constitute payments for services. The Court held the payments by the taxpayer's insurance business to the new entity were not deductible.
Tip of the Day
Commuting expenses . . . You cannot deduct commuting expenses. That's the cost of going between your home and your main place of work. If you haul tools, instruments, etc. in your car to and from work, you can deduct only the additional cost of hauling the items such as the rent on a trailer to carry the items.
January 12, 2010
News
Gifts to children, relatives, or others qualify for the gift tax exclusion if they are no more than $13,000 for 2010. But the exclusion applies to other than gifts of future interests in property. The regulations provide that "Future interest" is a legal term, and includes reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession, or enjoyment at some future date or time. An example in the regulations provides that where a trustee is authorized in his discretion to withhold payments of income for addition to trust corpus, the beneficiary's right to receive the income payments is not a present interest and no exclusion is allowed with respect to the transfer in trust. In Walter M. Price et ux. (T.C. Memo. 2010-2) the taxpayers made gifts of interests in a limited partnership to their adult children as a means of transferring interest in their shares in a closely held corporation. The Court noted the partnership agreement generally prevented any partner from withdrawing capital contributions, and generally prohibited the partner from the sale, assignment, transfer or encumbering the interest without the consent of all partners. The taxpayers contended that their gifts of the partnership interests were properly characterized as gifts of present interests because the donees could freely transfer the interests to one another or to the general partner. The IRS contended that the transferred partnership interests represented future interests because the partnership agreement effectively bars transfers to third parties and does not require income distributions to the limited partners. The Court noted in order to show that the gifts of the partnership interests afforded the donees the right to immediately use, possess, or enjoy the income therefrom, petitioners must show that: (1) The partnership would generate income at or near the time of the gifts; (2) some portion of that income would flow steadily to the donees; and (3) the portion of income flowing to the donees can be readily ascertained. The Court found the taxpayers failed to show the gifts of partnership interest conferred on the donees an unrestricted and noncontingent right to immediately use, possess, or enjoy either the property itself or the income from the property. Thus, the gifts were not entitled to the annual exclusion.
Tip of the Day
Rental payments not interest . . . If you live in a house (or your business occupies space in a building) you're buying before final settlement on the purchase, any payments you make for that period are rent and not interest. That's true even if the settlement papers call them interest. You can't deduct these payments as home mortgage interest.
January 11, 2010
News
Crew members on fishing boats are often treated as self-employed if they receive a percentage of the catch as compensation. Where a crew member is entitled to receive any compensation with respect to a voyage that does not depend on the size of the catch, the crew member is treated as an employee with respect to the entire amount of compensation paid (including the portion based on the amount of the catch) for that voyage. In James E. Anderson et al. (T.C. Memo. 2010-1) the taxpayer received compensation for repairs done on the boat that were unrelated to his activities as a crewman. The repairs were not done while the ship was at sea. He was engaged in two separate activities--one as a crewman on a fishing boat, the second as a mechanic. The Court found the taxpayer was self-employed when he worked as a crewman while fishing. The Court also held that the deduction for trade association dues could be used to determine the amount to be distributed to the crew. The calculation did not have to be limited to the costs of fuel, ice, and lubricating oil.
Tip of the Day
Approaching retirement? . . . Keep in mind there a limitations on when you can get into Medicare. The easiest time is between 3 months before your 65th birthday month and 3 months after your birthday month. There are also special enrollment periods within eight months after stoping work. If you don't sign up during one of these periods, your options are more limited. Specifically, you could end up without coverage for a number of months. For many individuals the Medicare decision has more financial consequences than deciding when to collect Social Security. Check with Social Security well ahead of the deadlines.
January 8, 2010
News
A taxpayer's last known address is the address shown on the return that was most recently filed at the time that the deficiency notice was issued absent clear and concise notice of a change of address. If the Commissioner knows of one address for the taxpayer and is then notified of another address for the same taxpayer, such other address supersedes the previous address and becomes that taxpayer's "last known address." In Estate of Paul Rule et al. (T.C. Memo. 2009-309) the estate informed the agent of the proper address to send correspondence and the IRS did, indeed, use that address. However, a deficiency notice was mailed to a prior address. The estate argued that the IRS knew at the time the deficiency notice was issued that the estate's address had changed, and that the IRS therefore failed to use reasonable care and diligence in mailing the deficiency notice to the estate's last known address. The Court agreed. The Court said the IRS failed to use reasonable care and diligence in ascertaining and mailing the notice to the new address. The Court dismissed the IRS's motion for lack of jurisdiction.
Check the law before making any assumptions. In In re Christian Herold Bourguignon and Terra Alvord Bourguignon (2009-2 USTC 50,717; U.S. Bankruptcy Court, Dist. Ida.) the Court found that amounts in a Sec. 529 college education account the taxpayers set up for their daughter was includable in the bankruptcy estate. The Court noted that for funds to be excluded under the law, they must be contributed to a 529 account at least a year before the filing of the bankruptcy, and, even then, there is a monetary cap on the excluded funds contributed between 365 and 720 days prior to the filing. Only those funds contributed more than 720 days before the filing are excluded without a monetary limit.
Tip of the Day
Gambling diary . . . You must keep an accurate diary or similar record of your losses and winnings. Your diary should contain at least the following information:
January 7, 2010
News
Revenue Procedure 2010-13 (IRB 2010-4) requires taxpayers to report to the IRS their groupings and regroupings of activities and the addition of specific activities within their existing groupings of activities for purposes of Section 469. Section 469 generally provides that income, losses, and credits from an activity will be passive unless the taxpayer materially participates in the activity. Treasury Regulation Section 1.469-4 allows taxpayers to group activities provided they make up an appropriate economic unit to enable taxpayers to meet the material participation standards.
The IRS has released this the National Taxpayer Advocate's 2009 Annual Report to Congress. This year's report designates the IRS’s declining ability to answer telephone calls as the most serious problem facing taxpayers. Ms. Olson notes that the IRS has set a target for fiscal year (FY) 2010 of answering only 71 percent of calls from taxpayers seeking to speak with a customer service representative about account questions, down from 83 percent in FY 2007. Among other findings, the report noted that over the past decade, the IRS increased its lien filings by nearly 475 percent – from about 168,000 in FY 1999 to nearly 966,000 in FY 2009, yet overall inflation-adjusted collection revenue declined by 7.4 percent during this period. You can find the full report at www.irs.gov/advocate/article/0,,id=217850,00.html.
In Lee D. Olesen et ux. (T.C. Memo. 2009-307) the matter before the Court was the IRS's motion in limine to exclude evidence challenging the amount or existence of unpaid liabilities. The taxpayers filed the petition in response to a Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 (determination notice). The Court was asked to decide whether the taxpayers could contest the amount of the section 6662(h) penalty for an underpayment attributable to gross valuation misstatements (underpayment penalty) by introducing evidence of a Son of BOSS settlement initiative the IRS offered. The Court found that the taxpayers were not entitled to introduce evidence challenging the amount of the underpayment penalty because they received a deficiency notice and are precluded from challenging the underlying liability in this collection review proceeding. The Court granted the IRS's motion in limine.
In George D. Shollenberger et ux. (T.C. Memo. 2009-306) the taxpayers were casual gamblers. On the way to the casino they withdrew $500 from their joint checking account. That day the husband hit a $2,000 jackpot on a dollar slot machine. The taxpayers each took $200 out of the jackpot winnings for additional slot machine play. They left the casino that day with $1,600, which they deposited the next day in their joint checking account. They did not report the gambling winnings and claimed the standard deduction. The IRS determined the taxpayers had $2,000 of unreported income from the winnings. The Tax Court cited Chief Counsel Advice which stated, in part, "The better view is that a casual gambler, such as the taxpayer who plays the slot machines, recognizes a wagering gain or loss at the time she redeems her tokens. We think that the fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the amount above or below basis (the wager) realized. For example, a casual gambler who enters a casino with $100 and redeems his or her tokens for $300 after playing the slot machines has a wagering gain of $200 ($300-$100). This is true even though the taxpayer may have had $1,000 in winning spins and $700 in losing spins during the course of play. Likewise, a casual gambler who enters a casino with $100 and loses the entire amount after playing the slot machines has a wagering loss of $100, even though the casual gambler may have had winning spins of $1,000 and losing spins of $1,100 during the course of play. The IRS effectively conceded the taxpayers' gross income from the slot machine play was $1,100 ($2,000 less $200 less $200 less starting amount of $500) and the Court held the taxpayers had $1,100 of gross income.
Tip of the Day
Don'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.
January 6, 2010
News
Notice 2010-06 (IRB 2010-03) permits taxpayers to correct certain failures of a nonqualified deferred compensation plan to comply with the plan document requirements of Sec. 409A, or in certain circumstances to limit the amount includible in income and additional taxes under Sec. 409A as a result of a plan document failure. Notice 2010-6 also clarifies certain aspects of Notice 2008-113, which addresses failures of nonqualified deferred compensation plans to comply with Sec. 409A in operation.
In Fact Sheet FS-2010-2 the IRS announced it is sending letters to paid preparers nationwide. These preparers are among those with large volumes of specific tax returns where the IRS typically sees frequent errors. Specifically, the letters will encourage return preparers to:
This filing season, IRS representatives will visit thousands of tax return preparers who received these letters to discuss many of the issues described. This is part of a broader effort by the IRS to step up its efforts to ensure paid tax return preparers are assisting taxpayers appropriately. Separately, the IRS will be conducting other compliance and education visits with return preparers on a variety of issues. In addition, the IRS will more widely use investigative tools during this filing season aimed at determining tax return preparer non-compliance. One of those tools will include visits to return preparers by IRS agents posing as a taxpayer.
The IRS has recently issued updates of the following publications:
Tip of the Day
Double-dip housing market? . . . More than a few professionals are saying it's possible. There's no question the housing market is fragile and without the new homebuyer tax credit and low interest rates, the market could head lower again. Unemployment and consumer confidence are other important factors. As always, real estate is a local market and experts have been wrong. But you should proceed with caution.
January 5, 2010
News
The IRS has issued the results of a six-month study that proposes new registration, testing and continuing education of tax return preparers. To bring immediate help to taxpayers this filing season, the IRS also announced a sweeping new effort to reach tax return preparers with enforcement and education. Based on the results of the Return Preparer Review, the IRS recommends a number of steps that it plans to implement for future filing seasons, including:
The IRS is also sending some 10,000 letters to paid tax return preparers who will also be visited by IRS Revenue Agents in the coming weeks to discuss their obligations and responsibilities to prepare accurate tax returns. This is part of a broader initiative by the IRS to step up its efforts to ensure paid tax return preparers are assisting clients appropriately. Separately, the IRS will be conducting other compliance and education visits with return preparers on a variety of issues. In addition, the IRS will more widely use investigative tools during this filing season aimed at determining tax return preparer non-compliance. One of those tools will include visits to return preparers by IRS agents posing as a taxpayer. The full 55-page report is available at www.irs.gov/pub/irs-pdf/p4832.pdf.
You may not be required to file an information return, but if you do the IRS cannot hold it against you. For example, even though you may pay an individual to mow your lawn at your residence, you don't have to give the individual a 1099-MISC. Likewise, only certain entities are required to file a Form 1099-C, Cancellation of Debt, statement. In Robert F. Cavoto, Plaintiff v. Mary Lou Hayes, Defendant (2009-2 USTC 50,707; U.S. District Court, No. Dist. Ill., East. Div.) The individual filed a 1099-C for unpaid debts allegedly owed by her ex-son-in-law. The Court noted nothing in the law forbids the voluntary filing of an information return. The individual also believed she was required to file the form.
Tip of the Day
Can't pay your installment agreement with the IRS? . . . You have several options available if your ability to pay has changed and you are unable to make payments on your installment agreement or your offer in compromise agreement with the IRS. Call the IRS immediately at 1-800-829-1040. Options could include reducing the monthly payment to reflect your current financial condition. You may be asked to provide proof of changes in your financial situation so have that information available when you call.
January 4, 2010
News
A new rule (IR-2009-122) has expanded to 120 days the time period during which the IRS may share a taxpayer’s tax-return information with third parties, based on a taxpayer’s written disclosure authorization. The newly-expanded time window is retroactive to Oct. 19, 2009. Consequently, any disclosure authorization signed and dated by a taxpayer on or after Oct. 19 qualifies for the new 120-day window. Forms affected by this change include:
Many taxpayers use these forms to authorize the sharing of their tax information with others, including financial service providers. The IRS will share the requested information with the designated third party, as long as the agency receives the disclosure authorization within 120 days of the date it is signed and dated by the taxpayer. The IRS on Dec. 18, 2009 released Notice 2010-08, which set forth an interim rule extending from 60 to 120 days the period within which signed and dated authorizations to disclose taxpayers’ tax-return information to third parties must be received by the IRS in order to be effective. The IRS made this change because some institutions charged with assisting taxpayers in their financial dealings have encountered difficulty in obtaining written disclosure authorizations and submitting them to the IRS within the 60 days allowed by the existing regulation. The interim rule will remain in effect until the IRS amends the regulations under Section 6103(c).
Revenue Ruling 2010-04 (IRB 2010-4) provides guidance on whether a tax return preparer is liable for criminal and civil penalties under Sections 7216 and 6713 when the tax return preparer uses tax return information to contact taxpayers to inform them of changes in tax law that could affect the taxpayers’ income tax liability reported in tax returns previously prepared or processed by the tax return preparer; uses tax return information to determine which taxpayers’ future income tax return filing obligations may be affected by a prospective change in tax rule or regulation and to contact such taxpayers to notify them of the changed rule or regulation, explain how the change may affect them, and advise them with regard to actions they may take in response to the change; or discloses tax return information contained in the list permitted to be maintained by the tax return preparer under section 301.7216-2(n) to a third-party service provider that creates, publishes, or distributes, by mail or e-mail, tax information and general business and economic information or analysis for educational purposes or for purposes of soliciting additional tax return preparation services for the tax return preparer, for the purpose of obtaining the ‘newsletter’ creation, publication, and or distribution services offered by the third-party service provider.
Revenue Ruling 2010-05 (IRB 2010-4) provides guidance on whether a tax return preparer is liable for criminal and civil penalties under Sections 7216 and 6713 when the tax return preparer discloses (1) to a professional liability insurance carrier tax return information required by the insurance carrier to obtain or maintain professional liability insurance coverage; (2) to a professional liability insurance carrier tax return information required by the insurance carrier to promptly and accurately report a claim or a potential claim against the tax return preparer, or to aid in the investigation of a claim or potential claim against the tax return preparer; (3) to a professional liability insurance carrier tax return information to the preparer’s professional liability insurance carrier in order to obtain legal representation under the terms of the insurance policy; or (4) tax return information to an unrelated attorney for the purpose of evaluating a claim or potential claim against the tax return preparer.
Notice 2010-13 (IRB 2010-4) updates the procedures for requesting a waiver of the requirement to electronically file returns when required by regulations and IRS publications. This notice affects corporations and tax-exempt organizations that file Form 1120, U.S. Corporation Income Tax Return; Form 1120-F, U.S. Income Tax Return of a Foreign Corporation; Form 1120S, U.S. Income Tax Return for an S Corporation; Form 990, Return of Organization Exempt From Income Tax; Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Trust Treated as a Private Foundation, and returns, amended returns and superseding returns in the Form 1120 and 990 family of returns that are required to be electronically filed. The notice also reduces the perfection period for rejected e-file returns from 20 to 10 days.
Tip of the Day
Married persons living apart . . . If you live apart from your spouse and meet certain tests, you may be considered unmarried. If that's the case, you can file as head of household even though you are not divorced or legally separated. Filing as head of household instead of married filing separately has a number of tax benefits.
Copyright 2009-2010 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