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May 22, 2015
The House has passed, by a 274 to 145 vote, the American Research and Competitiveness Bill of 2015. The bill makes the research tax credit permanent and increases (to 20 percent) the alternative simplified method. Since there are no revenue offsets, President Obama has indicated he would veto the measure.
You may be able to recovery attorney and related costs in a dispute with the IRS if you are the prevailing party. But, you must meet certain requirements, one is that the taxpayer must be the prevailing party. In Bonnie J. Angle (T.C. Memo. 2015-02) the Court found that the IRS's concessions in both an innocent spouse and a collection due process case constituted settlements under Sec. 7430(c)(4)(E)(ii)(1). Because the cases were settled the qualified offer rule did not apply and the taxpayer was not the prevailing party.
If a debt is forgiven, you may have cancellation of debt (COD) income. But the timing of the income can depend on the facts and circumstances. In Harold C. Johnston, Jr. et ux. (T.C. Memo. 2015-91) the IRS asserted the taxpayers had such income. The Court noted that the taxpayers were still making payments on the loan, the creditor had not written off the loan on its books and the taxpayer did not receive a Form 1099-C discharging the loan. The Court also noted that the expiration of a State limitations period can serve as an identifiable event, it is not conclusive as to when a debt has been discharged. The Court found the loan was not forgiven and there was no COD income. A second loan was discharged but the taxpayer qualified for the insolvency exemption.
Tip of the Day
Release of lien . . . You just made the final payment on your mortgage and you're waiting for the release from the bank to celebrate. You won't forget the day. But what about that car you financed? When you borrowed from the bank, credit union, etc. the lender put a lien on the car. While they usually routinely release the lien after the last payment, that's not always the case. One individual only found out there was still a lien on the car when she went to sell it--15 years after the purchase. One business found out the lender failed to release a lien on some equipment they leased. When the lender was acquired the new company claimed the final payments were never made and tried to collect the equipment. The business didn't even try to substantiate their claim. The equipment was obsolete and weighed almost a ton. They dared the lender to come and get it. But that's not always the case. Even your home mortgage may not be immune these days. Chances are it's changed hands many times over the years and the paperwork could be lost. Don't take a chance. Make sure you have proof liens on any property have been handled properly.
May 21, 2015
The IRS is reminding small businesses that the one-year program providing penalty relief to late filers of Form 5500 expires on June 2, 2015. Plan administrators and sponsors who fail to file required forms can face penalties of up to $15,000 per return. The plan usually must file Form 5500-EZ each year. The program is open to certain small business plans including owner-spouse plans, plans of business partnerships (together, “one-participant plans”) and certain foreign plans. You may apply for relief for multiple late returns in a single submission under this program. You can find more information in Revenue Procedure 2014-32.
In Khuong Duong and Dung T. Tran (T.C. Memo. 2015-90) the IRS used the bank deposits method to estimate the taxpayers' gross receipts from their businesses because they failed to maintain adequate books and records. During the audit they refused to provided the revenue agent with any records. The Court agreed with the IRS's computation of unreported income, but not with the IRS's determination of unreported tip income. The Court noted several flaws in the IRS's analysis and determined that computation to be arbitrary and erroneous. The Court did find that numerous badges of fraud demonstrated that one of the taxpayers intentionally evaded tax he knew to be owed and found the taxpayers liable for the civil fraud penalty. The Court found the other taxpayer's behavior did not rise to the level of fraud.
Tip of the Day
Charitable contributions . . . It sounds like a good idea. You rent your vacation home during the season, but just after peak you've got a week vacancy. So you donate a week's use to your church for use in a raffle. Bad move--for two reasons. First, the use of the home is deemed personal, not business. That means you won't be able to deduct the expenses during that time. Second, you'll get no charitable contribution deduction. That's because the gift of the right to use property doesn't qualify as a deductible contribution.
May 20, 2015
Revenue Ruling 2015-13 (IRB 2015-22) clarifies the effect of Emancipation Day and Patriots’ Day on the filing deadline for individuals filing their returns for Tax Year 2015.
In Ian D. Hughes et ux. (T.C. Memo. 2015-89) the taxpayers, on their original return, claimed zero basis in shares of K stock they sold and recognized long-term capital gain. They also reported a substantial capital loss from an unrelated transaction. On an amended return they reduced their reported loss from the unrelated transaction but increased their claimed basis in the K stock and reduced the gain from the sale of those shares. The taxpayers contend that the husband, who is and was a U.S. citizen and who was then a U.K. resident, gave the K shares to his wife, who was then a U.K. citizen and resident and that the wife took a fair market value basis in the shares and that the taxpayers accordingly recognized the reduced amount of gain reported on their amended return when the K shares were sold. The IRS contended that the husband did not make a completed gift to his wife and that the taxpayers had zero basis in the K shares when sold. The Court held that regardless of whether the husband transferred the K shares to his wife for U.S. tax purposes before the sale, the taxpayers had zero basis in the K shares when they sold them. The Court also held that the taxpayers were liable for the Section 6662(a), (b)(3), (e) and (h) gross valuation misstatement penalty with respect to any underpayment of tax attributable to their overstatement of bases in the K shares on the amended return. Finally, the Court found the taxpayers were not liable for the Sec. 6662(a) accuracy-related penalty for negligence or disregard of rules and regulations but were liable for the penalty for any substantial understatement of tax with respect to the balance of any underpayment.
Tip of the Day
Criminal charges . . . While the IRS does prosecute taxpayers under criminal statutes and seek jail time, the burden of proof is pretty high and there are far less cases than you would imagine. Some states, however, are far more aggressive, particularly when it comes to sales tax. In one case the underreporting of sales taxes by some $120,000 led the state to file one charge of grand larceny, 10 counts of offering a false instrument for filing and five counts of criminal tax fraud. If convicted, the defendant could face from five to 15 years in prison.
May 19, 2015
The statute of limitations on returns is generally three years. But once a tax is assessed the IRS has 10 years to collect it. In Leonid Pollak (U.S. District Court, D. Connecticut) the Court held the IRS produced presumptive proof in the form of Form 23C, Summary Record, and Forms 4340, Certificate of Assessments and Payments. The burden of proof was on the taxpayer and he failed to show that the assessment date was incorrect or that the claimed carryback should be allowed. The Court noted the assessment occurs on the date the Form 23C is signed, which is presumptively the valid assessment date.
Victims of a severe winter storms, snowstorms, flooding, landslides, and mudslides that took place from February 15 to 22, 2015 (FEMA-4216-DR), in parts of Kentucky may qualify for tax relief from the IRS and be able to deduct the losses on their 2014 federal income tax return. The affected counties are Boyd, Boyle Caldwell, Clark, Estill, Floyd, Harlan, Jackson, Jessamine, Knott, Knox, lawrence, Lee, Letcher, Lyon, Marshall, Menifee, Metcalfe, Morgan, Pendleton, Perry, Pike, Powell, Simpson, Taylor, Washington, and Wolfe.
Victims of a severe storms, tornadoes, flooding, landslides, and mudslides that took place from April 2 to 17, 2015 (FEMA-4217-DR), in parts of Kentucky may qualify for tax relief from the IRS and be able to deduct the losses on their 2014 federal income tax return. The affected counties are Bath, Bourbon, Breathitt, Bullitt, Carter, Clark, Elliot, Estill, Franklin, Jefferson, Johnson, Lawrence, Lee, Lewis, Madison, Magoffin, Metcalfe, Morgan, Owsley, Rowan, Scott, and Wolfe.
Tip of the Day
Starting a new business? . . . Or working on a new product? If it involves a new product (or even, in many cases, a service) get your suppliers involved early. Often they may have suggestions on how to simplify the manufacture, save costs, etc. At a very minimum you'll have a better idea of what your costs will be.
May 18, 2015
Currently, the IRS is not required to notify taxpayers that their Social Security number has been compromised. A bill has been introduced in the Senate that would require the IRS to notify suspected victims of identity theft. Among other requirements, under the bill the Social Security Administration would have to notify employers who submit fraudulently used Social Security numbers.
Tip of the Day
Recordkeeping works . . . In a recent Tax Court Summary Opinion the IRS had challenged the taxpayer's deduction of unreimbursed business expenses. The taxpayers introduced copies of a calendar where the taxpayer recorded his mileage (along with other expenses) at the end of each week. Based on his calender and surrounding information as well as the taxpayer's testimony, which the court found credible, the court allowed the deduction.
May 15, 2015
In Bob R. Davis et ux. (T.C. Memo. 2015-88) the taxpayer sold undeveloped land he owned appraised at $4.1 million to a charitable organization for $2.0 million, claiming a deduction of $2.1 million (the difference between the fair market value of $4.1 million and the amount received of $2.0 million). The IRS advanced three arguments in an attempt to deny the deduction. First, it argued that the taxpayer lacked a charitable intent when he sold the property. Second, that the taxpayer did not satisfy the contemporaneous written acknowledgment requirement of the law. Third, the Service argued the fair market value of the land was no more than $2 million at the time of sale. The Court found the taxpayer did have the donative intent. The Court dismissed several arguments, including the fact that the value of other nearby property the taxpayer owned would increase in value. The Court found the taxpayers had complied with the contemporaneous written acknowledgment requirement. The Court did reduce the claimed fair market value at the time of the contribution.
In David C. Costello et ux. (T.C. Memo. 2015-87) the Tax Court held the taxpayers had income from the sale of development rights on their farm and the income was characterized as long-term capital gain. The Court denied the taxpayers a deduction for a qualified charitable conservation contribution (in the form of a bargain sale) because they did not have a qualified appraisal. The defects in the appraisal were not trivial, formal, or mechanical.
Tip of the Day
Keep good records . . . That's always good advice. But it can be critical in the case of sales tax. Some states are famous for using the one-day observation test of restaurants and many other establishments if the business doesn't keep good records for sales tax purposes. The issue can be a real problem if the day the auditor picks is one of your best days of the week. It can get worse if sales have been growing over the last few years. The auditor could simply take the sales for the day and multiply by 313 (365 days less 52, assuming the business is closed one day a week) then multiply by 3 for a 3-year period. That's a real problem if sales two years ago were significantly less than today. Contesting the assessment could be difficult. You may have to have an expert witness show the test was not statistically correct. In some cases, even that won't get you off the hook. You're fighting from a poor position because you didn't maintain the required records.
May 14, 2015
The House has approved a bill that would ensure that federal and state benefits provided to public safety officers who die in the line of duty are not subject to tax (Don't Tax Our Fallen Public Safety Heroes Bill; HR 606). A separate bill (HR 2146) would allow federal law enforcement officers, firefighters and air traffic controllers to withdraw amounts from government plans after age 50 without incurring a penalty.
Victims of a severe winter storm that took place from February 15 to 17, 2015 (FEMA-4215-DR), in parts of Georgia may qualify for tax relief from the IRS. The affected counties are Banks, Barrow, Dawson, Elbert Forsyth, Franklin, Habersham, Hall, Jackson, Lumpkin, Madison, Oglethorpe, Pickens, Stephens, and White. Taxpayers affected may deduct the losses on their 2014 return.
You may be able to obtain an installment agreement to pay off your tax debts over time, but you'll have to meet certain requirements. In Andrew M. Hull et ux. (T.C. Memo. 2015-86) the Tax Court sided with the IRS in holding that the IRS did not abused its discretion in denying the taxpayers an installment agreement. The Court noted the taxpayers were currently noncompliant with their tax liabilities and had a history of noncompliance.
Tip of the Day
Keep it simple . . . Customers look for benefits and price in a product. What's in it for me? If the benefit is too difficult to explain, you'll probably lose them. (The exception to that rule is if you're selling to technically oriented customers.) The same is true of your offer. Two for the price of one or 30% off works. Buy two and we'll give you a coupon good for 30% off on your next order of any item priced the same or higher probably doesn't. Worse, you may attract bargain hunters savvy enough to take advantage of the deal but give you no additional business.
May 13, 2015
FinCEN has announced that the BSA E-Filing System now provides an alternative E-Filing method for Individuals filing the Report of Foreign Bank and Financial Accounts (FBAR). Filers can now choose between the current method of filing using an Adobe PDF or use the new online form that only requires a browser to file. For more information go to fincen.gov/whatsnew/pdf/20150511.pdf.
It's not unusual for business owners to worry more about making money, financing, etc. than the tax issues involved. Unfortunately, where and how income and expenses get reported can often be critical and a mistake costly. There were a number of issues in Coastal Heart Medical Group, Inc., et al. (T.C. Memo. 2015-84). The taxpayer-husband was a cardiologist who conducted business through a corporation. He set up an LLC to own and operate a CT scanner. His corporation paid for the construction of space for the scanner. The Tax Court held that the payment was a constructive dividend from the corporation to the taxpayer. The LLC took a deduction for lease payments for the scanner. The Tax Court held that the lease was actually a conditional purchase, noting that the term of the lease was approximately equal to the equipment's useful life and the taxpayer could have purchased the equipment at the end of the lease for less that the fair market value. The Court also held the liability from the purported lease did not give rise to a liability of the partnership because the asset was not formally contributed. The Court sided with the IRS's denial of some $272,244 of losses for lack of basis. In addition, the Court found that the LLC was not entitled to depreciation deductions for the scanner because it was owned by the corporation but because the LLC managed the scanner the income should have been reported by the LLC. Thus the LLC had the income, but the corporation was entitled to the deductions.
Tip of the Day
Search and seizure . . . You know the rules of evidence from the TV shows. Evidence obtained without a warrant isn't admissible. But some of the same exceptions apply to criminal tax cases. In one case the court held that evidence seized without a warrant and used against an individual accused of filing fraudulent returns did not have to be suppressed. The individual had the material in a hotel room and had no reasonable expectation of privacy because he wasn't a registered guest. The individual's claim that other evidence was tainted was rejected because the evidence in question was either returned or destroyed and he failed to show any actual misuse of the information.
May 12, 2015
The IRS has issued proposed regulations (REG-107595-11) that provide guidance regarding the application of the modified carryover basis rules of Section 1022. Specifically the proposed regulations will modify provisions of the Regulations involving basis rules by including a reference to Section 1022 where appropriate. The regulations will affect property transferred from certain decedents who died in 2010. The regulations affect Sections 48, 83, 179, 197, 267, 273, 306, 336, 355, 382, 421, 423, 424, 467, 617, 684, 691, 742, 743, 755, 995, 1001, 1014, 1223, 1245, 1250, 1254, 1296, and 1312.
The IRS has released Tax Tip 2015-06 for Landscapers and Gardeners. The information in the tip is far from extensive but there are links to other, valuable, sources of information.
Tip of the Day
Right to audit . . . You hire an independent contractor for consulting work and agree to reimburse him for expenses including meals, lodging, equipment rentals, subcontractors, etc. If the contract is substantial, make sure you include a right to audit his expenses. Contractors have been known to pad charges that should be legitimately passed through without a markup. Similarly, if you're a tenant in a building you should also have the right to review building cost data if a share of the expenses are being passed through on your lease.
May 11, 2015
The IRS has issued final and temporary regulations (T.D. 9719) amending the treatment of nonperiodic payments made or received pursuant to certain notional principal contracts. These regulations provide that, subject to certain exceptions, a notional principal contract with a nonperiodic payment, regardless of whether it is significant, must be treated as two separate transactions consisting of one or more loans and an on-market, level payment swap.
The IRS has announced that the Modernized e-File Production and Assurance Testing Systems (ATS) will be unavailable on Saturday, May 16 and on Saturday, June 6. The IRS will be conducting system maintenance on these two Saturdays from 7:00 a.m. until 3:00 p.m. Eastern Time.
Tip of the Day
Personal service can be a cheap alternative . . . There's more than one way to make customers happy. Most businesses go with the old standbys, price, quality, product selection, speed in completing job, etc. But all those can be expensive. Personal service will often generate the best customer loyalty and many times can be cheaper. It can be a salesman who takes extra time with a customer, a manager who will place a special order or waive a service charge, or someone who will stay at the office until 5:30 so the report can be picked up that day. Big businesses handle the problem by giving a customer support person or salesperson a certain amount of authority to offer a discount, waive a fee, etc. You might be able to do the same. If not, you've got to make a quick decision as to the cost versus benefit.
May 8, 2015
Victims of the severe storms, tornadoes, flooding, landslides, and mudslides that took place beginning on April 2, 2015, in parts of Kentucky may qualify for tax relief from the IRS. Following recent disaster declarations for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Kentucky will receive tax relief. The President has declared Bath, Bourbon, Carter, Elliott, Franklin, Jefferson, Lawrence, Madison, Rowan and Scott counties a federal disaster area. Individuals who reside or have a business in these counties may qualify for tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after April 2, and on or before July 31, have been postponed to July 31, 2015. This includes the April 15 deadline for filing 2014 individual income tax returns, making income tax payments and making 2014 contributions to an individual retirement account (IRA). In addition, affected taxpayers may claim the loss on their 2014 return. For more details go to Tax Relief for Victims of Severe Storms, Tornadoes, Flooding, Landslides and Mudslides in Kentucky.
Revenue Ruling 2015-11 (IRB 2015-21) holds that the cost of unrecoverable precious metals used in various manufacturing processes are depreciable under Secs. 167 and 168. The costs of any recoverable precious metals are not depreciable.
The House has passed a bill that would making the deduction for State and local general sales tax permanent.
In David H. Methvin (T.C. Memo. 2015-81) the Tax Court held that the taxpayer's net income from his minority working interests in oil and gas interests was self-employment income and subject to the self-employment tax. The taxpayer had argued that the interests were not part of a partnership, were no more than 2% to 3% in any single venture. The taxpayer received a Form 1099-MISC, but no partnership K-1.
Tip of the Day
Buying a business . . . You're probably also buying an established customer base. It's more than likely you'll lose some of them in the switch. With a personal service business you could lose some because they were just staying because of the owner--they weren't real happy with the pricing or the service, but Fred was in the club and . . . It some cases a customer will think it's a good time to do some comparison shopping. There could be a number of other reasons. Don't assume that one letter from the seller will cement your relationship with the customers. Make an extra effort. If the base is small enough, personal visits introducing yourself to each customer may be in order. An open house is another option. The best approaches will depend on several factors. Just don't leave it to the seller and a minimal gesture.
May 7, 2015
The IRS has updated (Notice 2015-38, IRB 2015-21) its list of designated private delivery services for purposes of timely mailing as timely filing/paying rule of Sec. 7502. Added to the list are Federal Express Corporation's FedEx First Overnight, FedEx International First Next Flight Out, and FedEx International Economy and United Parcel Service (UPS) UPS Next Day Air Early AM. Deleted are five services provided by DHL Express--DHL Same Day Service; DHL Next Day 10:30 am; DHL Next Day 12:00 pm; DHL Next Day 3:00 pm; and DHL 2nd Day Service.
The IRS has release proposed regulations (REG-132634-14) under Sec. 7704(d)(1)(E) relating to qualifying income from exploration, development, mining or production, processing, refining, transportation, and marketing of minerals or natural resources. The proposed regulations affect publicly traded partnerships and their partners.
Alimony is deductible by the payor and income to the recipient; child support payments are neither income nor deductible. One of the requirements for payments to be alimony is that they cease on the death of the recipient ex-spouse. In David Iglicki and Laura J. Stultz (T.C. Memo. 2015-80) as part of the taxpayer's divorce agreement he was to pay $735 per month in child support to his ex-spouse. The separation agreement did not require the taxpayer to pay any spousal support unless he defaulted on his obligations under the separation agreement. If he did default, he would become immediately liable for $1,000 per month in spousal support. The obligation would continue until his ex-spouse died, the taxpayer died, or he made 36 payments. The taxpayer did default and a Colorado state court (the taxpayer's new domicile) ordered him past due child support and interest and $36,000 in past due spousal support plus interest. The Tax Court looked to Colorado law which provides that liability for payment of a final money judgment is not affected by the death of either the payor or the payee. Thus, the Court found the spousal support payments failed to qualify as alimony and denied the taxpayer's alimony deduction.
In Walter D. Ligman (T.C. Memo. 2015-79) the Tax Court found the IRS did not abuse its discretion in finding that the taxpayer's Railroad Retirement benefits, while partially levy proof, could still be considered when making a determination of a taxpayer's income and ability to pay for purposes of determining availability of a collection alternative (in this case, an installment agreement).
Tip of the Day
Security deposits for landlords . . . A security deposit is not income when you receive it if you plan to return it to your tenant at the end of the lease. If you keep part or all of the deposit during any year because the tenant does not comply with the lease, creates an expense for which he's liable, etc., the amount you keep is income. On the other hand, if the security deposit is intended to by the final payment of the rent and would not be returned, it is advance rent and income on receipt.
May 6, 2015
Revenue Ruling 2015-10 (IRB 2015-21) provides guidance on the proper federal income tax treatment of a “triple drop and check” reorganization transaction. In a related action, Revenue Ruling 2015-9 (IRB 2015-21) revokes Rev. Rul. 78-130.
The IRS is reminding (IR-2015-78) tax-exempt organizations that many have a filing deadline for Form 990-series information returns in mid-May (generally, calendar-year organizations). With the May 15 filing deadline facing many tax-exempt organizations, the IRS cautioned these groups not to include Social Security numbers (SSNs) or other unneeded personal information on their Form 990, and consider taking advantage of the speed and convenience of electronic filing.
Revenue Procedure 2015-30 (IRB 2015-20) provides the 2016 inflation adjusted deduction limitations for annual contributions made to a health savings account (HSA) under Section 223. These deduction limitations are updated annually pursuant to Section 223(g) to reflect the cost-of-living adjustments. The annual limitation on deductions for a self-only coverage is $3,350; $6,750 for family coverage. The maximum deductible, co-pay and other amounts (but not premiums) cannot exceed $6,550 for self-only coverage or $13,100 for family coverage.
In an audit, the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS still does not have effective processes to identify erroneous claims for education credits. Although the IRS has taken steps to address some of TIGTA's recommendations, many of the deficiencies TIGTA previously identified still exist. As a result, taxpayers continue to receive billions of dollars in potentially erroneous education credits. Based on our analysis of education credits claimed and received on Tax Year 2012 tax returns, TIGTA estimates that more than 3.6 million taxpayers (claiming more than 3.8 million students) received more than $5.6 billion in potentially erroneous education credits ($2.5 billion in refundable credits and $3.1 billion in nonrefundable credits). To see the full report go to www.treas.gov/tigta/auditreports/2015reports/201540027fr.html
Tip of the Day
Reciprocal lunches . . . Taking a business associate, customer, client, or an employee or partner out to lunch (or dinner) is often an important part of maintaining customer relations, getting an order, etc. For salesmen, partners, etc. that can often be an every day occurrence. The IRS won't question it if you've got the required documentation. But the IRS can, and has, challenged reciprocal meals. For example, Madison LLC has three partners--Fred, Sue, and Emma. Fred takes Sue and Emma out on Mondays and Fridays, Sue taxes Fred and Emma out on Tuesdays and Thursdays, and Emma takes Sue and Fred out on Wednesdays. The IRS has challenged this type of arrangement and won in Tax Court.
May 5, 2015
A bill has been introduced in the House (Real Estate Investment and Jobs Bill of 2015) that would relax restrictions on foreign investment in U.S. real estate. It would affect foreign investments in real estate investment trusts (REITs) and exempt from FIRPTA (the Foreign Investment in Real Property Tax Act of 1980) foreign pension funds investing in commercial real estate.
The IRS is reminding small businesses that have failed to timely file certain required retirement plan returns that they have until Tuesday, June 2 to take advantage of a special penalty relief program with respect to pension plan filings. Launched June 2, 2014, the one-year temporary pilot program is designed to help small businesses with retirement plans that may have been unaware of the reporting requirements that apply to these plans. Normally, the plan administrators and sponsors of these plans who fail to file required annual returns, usually Form 5500-EZ, can face stiff penalties--up to $15,000 per return. This program is generally open to certain small business (owner-spouse) plans and plans of business partnerships (together, “one-participant plans”) and certain foreign plans. Those who have already been assessed a penalty for late filings are not eligible for this program. Applicants under the program may include multiple late returns in a single submission. There is no filing fee or other payment required. For more information go to Rev. Proc. 2014-32.
Tip of the Day
Improve company's work environment . . . It may not be more money that employees want, it can be any number of intangibles. Most employees dislike filling out timesheets, expense reports, etc. Many of these are a necessary evil for state labor laws, tax return requirements, accounting, etc. But some may be carry overs from the past and have little or no value. In some cases the forms can be simplified, or entered electronically. For some reason entering data in a smart phone or tablet seems less tedious than putting it on paper. There's a side benefit. Eliminating or simplifying paperwork can save money by reducing both the time it takes to complete the form and the time it takes to enter the information.
May 4, 2015
House Ways and Means Chairman Paul Ryan (R-Wis.) wants to make the tax extenders part of a limited tax reform package, but if that fails to happen he wants to make them permanent on their own by the end of the summer.
In Anna E. Charlton and Gary L. Francione (U.S. Court of Appeals, Third Circuit) the Court upheld a District Court ruling that the wife had no standing to sue because the IRS was not seeking to collect taxes from her. The husband could not establish an entitlement to mandamus relief, because he could not show that he had no other remedy at law. He had at least one other remedy, he could bring a refund suit. The Court noted that mandamus . . . is intended to provide a remedy for a plaintiff only if he has exhausted all other avenues of relief and only if the defendant woes him a clear nondiscretionary duty.
Tip of the Day
Renting property on a short-term basis? . . . If you're renting a property on a weekly or monthly basis, there are two points to consider. First, many states have a rooms tax. It's much like a sales tax and applies to short-term rentals. The rules vary from state-to-state, but many states use a 30-day threshold. Rent the property for 30 days or less and you'll be liable for the tax. In many states the tax rate is more than the regular sales tax. Check the rules in your state. Second, if the average rental is for seven days or less (often the case in renting vacation property), you can't use the $25,000 passive loss exception for rental real estate. Thus, your losses may not be tax deductible unless you can show you materially participate in the activity. Check with your tax advisor for the rules.
May 1, 2015
In order to commence legal action a corporation, LLC, etc. must exist. In Leodis C. Matthews, APC, a California Corporation (T.C. Memo. 2015-78) the Tax Court dismissed the corporation's petition for redetermination for lack of jurisdiction. The California Franchise Tax Board suspended the taxpayer's powers, rights, and privileges for failure to pay state taxes on May 1, 2013 and the suspension remained in effect until November 26, 2014 when the corporation was reinstated. On June 30, 2014 the IRS mailed the taxpayer a notice of deficiency. On October 1, 2014 the taxpayer petitioned the Court challenging the determination. The IRS filed a motion to dismiss for lack of jurisdiction, alleging that the taxpayer lacked the capacity to sue at the time is petition was filed. The taxpayer argued that the November 26, 2014 reinstatement retroactively restored its capacity. The Court sided with the IRS and held that a revived California corporation may not retroactively validate the filing of a petition that occurred during the suspension of its corporate powers. The Court dismissed the motion for lack of jurisdiction.
Once you've filed for bankruptcy, you're protected from your creditors. In David Eugene Yuska (T.C. Memo. 2015-77) the IRS sent the taxpayer a Notice of Federal Tax Lien Filing with regard to his unpaid Federal income tax for the taxpayer years 2005 and 2006. The taxpayer submitted a timely request for a hearing under Secs. 6320 and 6330. After the request, the taxpayer filed a bankruptcy petition under chapter 13. While the bankruptcy case remained open, the IRS issued the taxpayer a Notice of Determination Concerning Collection Action for the years at issue. In response the taxpayer filed a petition for review challenging the notice. The IRS filed a motion to dismiss for lack of jurisdiction on the ground that the petition was filed in violation of the automatic stay imposed by the bankruptcy law. The taxpayer filed an objection. The Court held that the notice of determination was issued to the taxpayer in violation of the automatic stay imposed by the bankruptcy law and was invalid and of no effect. The Court also held that the IRS's motion to dismiss for lack of jurisdiction be denied, and the case dismissed for lack of jurisdiction on the Court's own motion.
Tip of the Day
Call them back . . . Want to get more business? Call your prospects back quickly. If you're in a service business, there's a good chance you can beat your competition by just returning prospective customers' calls. We understand that contractors that return calls promptly often hear customers say no one else has called them back. A plus may be that if you're the first responder there's a good chance you won't have to bid little jobs. That could improve your margins.
April 30, 2015
The IRS has announced the release of the third quarter update to the 2014-2015 Priority Guidance Plan. For complete details go to www.irs.gov/uac/Priority-Guidance-Plan.
Legislation has been introduced by Rep. Joe Courtney, D-Conn. that would repeal the excise tax on "Cadillac" health insurance plans. Under current law a 40-percent excise tax would apply to health insurance expenditures that exceed a certain threshold.
Tip of the Day
Sales tax and related parties . . . Most states provide an exemption for sales of property to a related party. For example, the transfer of a car from a father to his daughter. How far the exemption goes depends on the state--most are limited to immediate family. Transfers to another entity such as from a shareholder to a corporation aren't as universal. Most states do provide an exemption where assets are transferred on the initial incorporation (e.g., where a taxpayer contributes assets in exchange for stock in the corporation) or startup of a partnership.
April 29, 2015
Notice 2015-10 (IRB 2015-20) announces that the Department of the Treasury and the IRS intend to issue regulations applicable to claims for refund or credit for amounts withheld under chapter 3 or 4. In general, these regulations will provide that an otherwise allowable claim of refund or credit made by a claimant that is the beneficial owner of a withheld payment is only available to the extent that the relevant withholding agent deposited the amount withheld. The regulations will also provide for a pro rata allocation of the amount available to the claimant for refund or credit when a withholding agent has partially satisfied its deposit requirements. The Treasury Department and the IRS are considering exceptions to the general rules described in the notice that are administrable by the IRS and minimize the potential for fraud or the intentional under-deposit of withholding taxes. The notice requests public comments concerning the administration of the pro rata allocation and procedural rules described in the notice, the potential exceptions described in the notice, and other potential exceptions consistent with the purposes of the guidance described in the notice. The regulations will apply to claims for refund or credit for amounts withheld with respect to the 2015 calendar year and thereafter.
The Senate Finance Committee has reported the markup of a bill that would make several changes to 529 college savings plans. The first includes a computer in qualified educational expenses. The second provides relief if the student withdraws for illness or other reasons and provides refunds would not be subject to a penalty and taxation if redeposited in a 529 plan. A third provision eliminates a rule that increased administrative paperwork. The bill has bipartisan support so there's a good chance of passage.
Tip of the Day
Home office . . . Deducting a home office is easier now that the IRS has provided a "safe harbor" method (you can take a deduction of $5 a square foot up to 300 square feet). The approach reduces computation to a minimum and doesn't impact your real estate or mortgage interest deduction. But the basic requirements to secure any deduction are unchanged. The room must be used exclusively for the home office. That means people can't use it for any other purpose, even as a passage to another room.
April 28, 2015
Notice 2015-37 (IRB 2015-19) provides guidance on eligibility for minimum essential coverage under Sec. 36B of the Code for individuals who may enroll in coverage under Children’s Health Insurance (CHIP) “buy-in” programs that the Department of Health and Human Services (HHS) designates as minimum essential coverage. The guidance is for coverage dates after January 1, 2015 for qualifying for the premium credit.
Tip of the Day
Reverse mortgage? . . . It's a heavily advertised product, but do they make sense? For most homeowners, probably not. First, the up front costs are relatively high. That means you'll have spent some of the equity in your home even before getting your first check. Second, at some point the money will run out and if you're depending on the cash from a reverse mortgage now, what are your options when your equity has been exhausted? You may be better off selling the house and moving into cheaper accommodations. A reverse mortgage is not a financial planning tool but a last option. Do they ever make sense? There are circumstances such as when the homeowner is single, has no other source of funds, wants to remain in his or her home, and clearly will not outlive the reverse mortgage.
April 27, 2015
The president has determined that as a result of a severe winter storm and snowstorm from January 26 to 28, 2015 (FEMA-4213-DR), taxpayers in the affected areas of Connecticut may deduct the losses on their 2014 returns. The areas include the counties of New London, Tolland, and Windham.
The IRS is reminding Enrolled Agents with Social Security Numbers ending in 7, 8, or 9, or those without an SSN who haven’t timely renewed their enrollment status, need to do so as soon as possible. The IRS will soon begin moving these Enrolled Agents to inactive or terminated status. Go towww.irs.gov/Tax-Professionals/Enrolled-Agent-News for more information.
Tip of the Day
Check your lease . . . That lease you signed probably was many pages long. Chances are you didn't read it completely and, even if you did, more than likely you don't remember all the terms. If it's been more than a year since you signed it, it's time to read it over again. After the first year you probably got a step-up in rent because of increased real estate taxes, utilities, or general operating expenses. Or you may also be subject to a rent step based on a dollar amount or percentage. It's certainly not unheard of a landlord making an incorrect calculation of the rent increase. Even a small error could easily result in several thousands in extra annual costs for a small business. Retailers may have an additional reason to review their lease. Many leases for malls or larger strip centers contain a cotenancy clause. The clause kicks in when the center or less than a certain percentage occupied, often 80 percent. Once the occupancy drops below that level, tenants are entitled to a lower rent or sometimes allowed to cancel the lease without penalty. There may be other savings lurking in your lease. This is a technical area. Get help from a real-estate professional.
April 24, 2015
The rental of real property is generally a passive activity that produces passive losses and passive income. Passive income can be offset by passive losses. But not all rental activity income is passive. One exception is a self-rental, that is where a taxpayer rents property for use in a trade or business in which the taxpayer materially participates. For example, you own a warehouse that you rent to your S corporation (or LLC) in which you materially participate. The rental results in net income. The income is not passive and can't be used to offset passive losses. In Larry Williams et ux. (T.C. Memo. 2015-76) the real property was owned by an S corporation (in which the taxpayers were the sole shareholders) and rented to another entity, a C corporation, in which the taxpayer materially participated. The taxpayers argued that Sec. 469 does not, on its face, apply to S corporations. They also argued that Reg. Sec. 1.469-2(f)(6) does not apply since the lessor did not materially participate in the trade or business of the lessee. The Court noted that while it was true that Sec. 469 does not specifically refer to S corporations, since an S corporation is a passthrough entity and does not pay tax, it is the individual shareholders of the corporation that pays the tax. Thus, the law is applicable to an S corporation. The Court dismissed the second argument in that it could find no authority in the plain language of the regulations to support the taxpayers' argument containing lessor-lessee.
Tip of the Day
Are you a premium tenant? . . . Some tenants in shopping or strip centers can draw a disproportionate amount of traffic. That's good news for center owners and other tenants. But it could be good news for you too if you're a premium tenant. You may be able to negotiate a lower rent. You'll have the most clout when your lease is coming up for renewal. If you're looking for new space, make that pitch to your potential landlord.
April 23, 2015
The IRS is reminding (IR-2015-72) businesses and tax-exempt organizations that they have until April 30, 2015 to request certification for those workers hired in 2014 that qualify for the work opportunity tax credit (WOTC). Newly revised Form 8550 is used by employers to request certification. More information is available in Notice 2015-13.
The president has determined that as a result of a severe winter storm, snowstorm, and flooding from January 26 to 28, 2015, taxpayers in the affected areas of Massachusetts may deduct the losses on their 2014 returns. The affected counties include Barnstable, Bristol, Dukes, Essex, Middlesex, Natucket, Norfolk, Plymouth, Suffolk, and Worcester.
In Dan E. Butts et ux. (T.C. Memo. 2015-74) the taxpayers did not timely file returns for 2007 and 2008. The IRS issued a notice of deficiency to each taxpayer for 2008 and to the taxpayer-husband for 2007. the taxpayer jointly petitioned the Court with respect to those three notices of deficiency. After the taxpayers filed their joint petition, the IRS issued a notice of deficiency to the taxpayer-wife for her 2007 tax year, and she then filed a separate petition with respect to that notice of deficiency. Thereafter, the taxpayers filed joint income tax returns for 2007 and 2008, claiming on the 2007 return an overpayment attributable to tax withholding by the wife's employer from her 2007 wages. The parties have stipulated an overpayment for 2007 but dispute whether the taxpayers are entitled to a refund of that overpayment. The Court held that Sec. 6512(b)(3) requires the application in the instant case of the two-year lookback period in Sec. 6511(b)(2)(B). The Court also held it lacked jurisdiction under Sec. 6511 and 6512 to order a refund of the 2007 overpayment because no portion of it was paid with the applicable lookback period.
Tip of the Day
Labor market getting tighter? . . . It is in some areas and for some professions. Review your near-term future requirements. If you'll need to fill an important slot or one requiring special skills, you should plan ahead.
April 22, 2015
Section 5000C, imposes on any foreign person that receives a specified Federal procurement payment a tax equal to 2 percent of the amount of the payment. Section 5000C(b) defines a specified Federal procurement payment as any payment made to a foreign person pursuant to a procurement contract with the U.S. government entered into on and after January 2, 2011, to provide goods or services if the goods are manufactured or produced in, or the services are provided in, any country that is not a party to an international procurement agreement with the United States. Notice 2015-35 (IRB 2015-18) provides a list of qualified income tax treaties that exempt all nationals of that country from the tax imposed under Section 5000C.
In Clarence William Speer et ux. (144 T.C. No. 14) the taxpayer was a retired Los Angeles Police Department detective, failed to report as gross income payments that, on his retirement, he received from the department cashing out his unused vacation time and sick leave (leave payments). The taxpayers argued that some portions of his unused vacation time and sick leave accrued when he was on temporary disability leave from the department pursuant to sec. 4.177 of the Los Angeles Administrative Code, which in part provides that a temporarily disabled member of the Police Department shall receive as temporary disability compensation an amount equal to his base salary. The taxpayers argued that at least some portions of the leave payments are excludable from gross income under Sec. 104(a)(1) as amounts received under a workmen's compensation act as compensation for personal injuries or sickness. The Court held that the leave payments were not received under a workmen's compensation act as compensation for personal injuries or sickness and, therefore, no portion was excludable.
Tip of the Day
Closing your business? . . . Or discontinuing an operation? Even if your venture produced only losses and there are no physical assets left, you still may have intangible assets that can bring some money. For example, you might have a name that's known locally, regionally, or even nationally. How much it's worth will depend on a number of factors. You should consider getting the name trademarked before attempting to sell it. Another frequently encountered intangible is your customer list. That list can be extremely valuable. In a competitive environment recommending another supplier or service provider can generate real income. Depending on your business, there may be other intangibles. A restaurant might be able to sell certain special recipes, etc. Talk to your accountant, business adviser or attorney.
April 21, 2015
As a result of a severe winter storm and snowstorm from January 26 to 28, 2015 (FEMA-4212-DR) the president has declared certain counties in Rhode Island disaster areas and affected taxpayers may deduct losses sustained from the disaster on their 2014 return. The counties include Bristol, Kent, Newport, Providence and Washington.
You can have your debts discharged in bankruptcy, but you've got to meet certain requirements. In the case of Federal tax debts, you must have filed a return that meets the definition of a return under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The law defines return as a return that satisfies the requires of applicable nonbankruptcy law (including applicable filing requirements). A return prepared by the IRS, a "substitute for return" under Sec. 6020, isn't included in that definition. In In re: James Robert Biggers et al. (U.S. Bankruptcy Court, M.D. Tennessee) the Court found that the debtors' late filed returns (after the IRS had generated substitute returns) for three of the years all reported a lower liability than the amount originally assessed by the IRS, and therefore, served no purpose and the associated tax debts were not dischargeable.
Tip of the Day
Putting off asset replacements? . . . Taxes are only a part of the analysis. Most small businesses can expense a significant amount. While the law is currently back to $25,000 under the Sec. 179 expense option, no one doubts that a higher level will be reinstated for 2015 (it was $500,000 in 2014). From a business standpoint, now might be a good time to replace old, worn-out property. And, no matter how tight cash is, there comes a time when replacement is required. That's when the efficiency of the machine has declined beyond a certain point and downtime and repair costs are rising rapidly. Many businesses are starting to buy replacement equipment and that's likely to accelerate. Buying now might make sense, particularly if you've got to finance the purchase. But you should have a good idea of where your sales and your business are headed in the near future. Ideally, you'd like to anticipate demand to be ready and get a jump on your competition, but you don't want to invest in equipment that will lay idle.
April 20, 2015
The House has passed a bill that would permanently repeal the estate and generation-skipping transfer tax (GST). The bill will most likely pass the Senate, but President Obama has said he would veto the measure.
Tip of the Day
Negotiate the easy stuff first . . . Often negotiations on a deal break down over items that shouldn't be deal breakers. Try avoiding those issues until later. There are probably a number of points where both parties (if they're willing to do a deal) can agree. If you can negotiate through the smaller points both sides might see there's room for compromise on the other issues and might see it'd be foolish to abandon the deal because there isn't much separating them. Before taking that approach make sure there are no issues where neither side will budge. For example, you need seller financing to pay at least 40% of the purchase price for the business and the seller has to have all cash because of other commitments. Unless you can overcome that obstacle, the deal might be a non starter.
April 17, 2015
In pass-through entities (partnerships, LLCs, S corporations) as in a sole proprietorship, the liability for state income taxes generally falls on the partner, member, etc. In Matthew L. Cutler et ux. (T.C. Memo. 2015-73) the taxpayer was a member in a partnership that did business in several states. Even though the taxpayer did not work in most of the states, he had to pay his nonresident share of state taxes there based on his share of the partnership income. The taxpayer deducted the state taxes he paid as unremimbursed partnership expenses on Schedule E. The Court held the taxes were not imposed on the partnership but on the partners and could only be deducted as an itemized deduction on Schedule A of Form 1040.
Many taxpayers take a deduction for clothing, furniture, appliances, given to charitable organizations. Tax preparers often see the contribution described as "4 bags of clothing" along with an unsigned and undated receipt from the charity. That isn't nearly enough to satisfy the IRS requirements. In Kenneth James Kunkel et ux. (T.C. Memo. 2015-71) the IRS challenged the taxpayer's deduction of some $37,000 for clothing, books, toys, jewelry, etc. The taxpayers mistaken thought that contributions of less than $250 did not need a receipt from the charity. The Court found that the "doorknob hangers" provided as receipts by the truck drivers from two organizations clearly failed to satisfy the substantiation requirements. They were undated, not specific as to the taxpayers, did not describe the property contributed and contained none of the other required information. The Court noted that for noncash contributions in excess of $500 a taxpayer was show additional information such as the date the item was acquired and the manner of acquisition as well as the cost of the property. Since the taxpayer claimed donations of clothing and books each in amounts greater than $5,000, an appraisal was required. The Court disallowed all their noncash charitable contributions and imposed an accuracy-related penalty.
Tip of the Day
Robbing future revenue . . . Sometimes the urge to show higher sales every quarter or year gets out of hand. Having a big push at the end of a month or quarter often means you're just taking sales from the next period. Sometimes that's OK. For example, when you need a short-term boost in cashflow. But it usually doesn't work over the long term. The approach can have a negative effect on employee morale. In some cases it can depress profits by having salesmen offer special deals just to get the sales numbers. If you're planning on using such a technique, think it through first.
April 16, 2015
That Form 1098 you receive from the bank for your mortgage interest is important documentation for taking a mortgage interest deduction. While it's not necessary in order to secure a deduction, it'll make things much easier. In Saad Al-Soufi and Samia Schreitah (T.C. Memo. 2015-68) the IRS challenged the taxpayers' mortgage interest deduction on a home in Syria. The taxpayer was unable to prove he lived in the property or that he rented it out. He could not show he paid interest on a mortgage. The Court did not allow a letter from the mortgage company to be introduced because it did not bear the indicia of trustworthiness. The timing of the letter was suspect as the taxpayer requested it two months after receiving the deficiency notice from the IRS, the amount of the interest was specified in dollars rather than Syrian pounds, and the amount was exactly equal to the amount the taxpayer computer from his amortization schedule, down to the penny. The Court denied the deduction.
Tip of the Day
Don't overreact . . . One of the advantages of a small business is that it can react quickly to change. But there's also a danger of overreacting. Unless the situation requires immediate action--a fire, explosion, chemical spill (and there should be a plan in place for those)--take the time to evaluate the situation. If there are personal issues involved (e.g., you get a chance to eliminate a bitter rival) get an independent opinion. You should have one or more people you can rely on to give you a second opinion with a different insight. More often than not that could be your CPA or attorney for a small business, or your controller, etc. if you have one. You want to move quickly, but not without analysis.
April 15, 2015
Notice 2015-33 (IRB 2015-18) provides adjusted limitations on housing expenses for tax year 2015 for purposes of the foreign earned income exclusion and foreign housing exclusion.
You may be able to recover your litigation costs from the IRS if you are the prevailing party in a dispute, even if you don't go to court to fight the IRS. But that's not the only test you have to pass. In Chad R. Baldwin (T.C. Memo. 2015-66) the taxpayer was the prevailing party but the Court found the IRS's position was substantially justified because it was more than three years after the notice of deficiency was issued that the taxpayer submitted all of the relevant documentation to the IRS to prove his claims. The Court denied the taxpayer's claim for his costs.
Tip of the Day
Chasing a deal . . . If you're buying a building, looking to acquire a business, bidding on a contract, etc. work up your best numbers (and options) first. Maybe add a little more if there are other, intangibles to consider. Then go that far and no further. When you start chasing a deal you run the risk you'll pay more than you can afford or you'll find the deal no longer provides your required return. There's a building for sale that, with a little work, would be perfect for your business. There are other properties that fit your requirements, but the location gives it an edge. Based on your numbers it's worth $1.5 million. The asking price was $1.6, but other potential buyers have bid it up to $1.95. If you bid slightly more, you could get the property, but it would leave you with almost no cash reserves. Walking away would probably be the smart move. The higher debt service could impact your operations.
Copyright 2015 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536