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March 10, 2014
The IRS has updated its webpage Questions and Answers on the Premium Tax Credit.
The IRS released a new YouTube video designed to provide useful tax tips to married same-sex couples. The video is the latest addition to an online library featuring short IRS instructional videos covering more than 100 topics ranging from tips for victims of identity theft to taking advantage of the new simplified home office deduction. The new video, less than two minutes long, is available in English, Spanish and American Sign Language and can be accessed via IRS.gov.
The IRS has released updates to Form 944-X and the accompanying instructions. Form 944-X is used to amend Form 944. The IRS has also released Publication 505, Tax Withholding and Estimated Tax and the instructions for Form 8615, Tax for Certain Children Who Have Unearned Income.
Tip of the Day
Mortgage interest and alternative minimum tax . . . Many taxpayers are finding themselves subject to the alternative minimum tax. That's due in large part to the phaseout of the exemption amount as income rises above a threshold amount. Tax programs generally take into account the biggest modification to income--taxes deducted on Schedule A. But it's easy to miss the second most likely adjustment--mortgage interest. For alternative minimum tax purposes you can deduct the interest on your primary residence and a second home--but not interest on a home equity loan that was deductible on Schedule A. Interest on funds borrowed to pay for home improvements counts the same as interest to acquire the home. For example, Fred and Sue refinanced a $300,000 mortgage with a $350,000 one. They used $30,000 of the proceeds to pay off credit card debt and $20,000 to add a garage to the house. Interest on the $30,000 would not be deductible for alternative minimum tax purposes.
March 7, 2014
The IRS has issued final regulations (T.D. 9660) providing guidance to providers of minimum essential health coverage that are subject to the information reporting requirements of Section 6055 of the Code, enacted by the Patient Protection and Affordable Care Act. Health insurance issuers, certain employers, and others that provide minimum essential coverage to individuals must report to the IRS information about the type and period of coverage and furnish the information in statements to covered individuals. These final regulations affect health insurance issuers and carriers, employers, governments, and other persons that provide minimum essential coverage to individuals.
The IRS has issued final regulations (T.D. 9661) providing guidance to employers that are subject to the information reporting requirements under Section 6056 of the Code, enacted by the Affordable Care Act (generally employers with at least 50 full-time employees, including full-time equivalent employees). Section 6056 requires those employers to report to the IRS information about the health care coverage, if any, they offered to full-time employees, in order to administer the employer shared responsibility provisions of Section 4980H of the Code. Section 6056 also requires those employers to furnish related statements to employees that employees may use to determine whether, for each month of the calendar year, they may claim on their individual tax returns a premium tax credit under section 36B (premium tax credit). The regulations provide for a general reporting method and alternative reporting methods designed to simplify and reduce the cost of reporting for employers subject to the information reporting requirements under Section 6056.
Who's a partner? The answer got murky in a community property state case. In Ann S. Carrino et al. (T.C. Memo. 2014-34) the taxpayer and her spouse legally separated in June 2002. Shortly thereafter, the spouse used community property to fund a partnership that operated a successful hedge fund. That partnership's original 2003 return didn't name the taxpayer as a partner or report any distributions to her. A few years later--in November 2006--a state court approved the couple's agreement that 72.5% of the then-current value of the spouse's investment in the partnership was community property. In response, the spouse filed an amended 2003 partnership return that identified the taxpayer as a partner. The IRS argued that the taxpayer owed tax on the income attributable to her share of the partnership in which she didn't know she was a partner. The taxpayer disagreed with the assertion. The Court concluded that the taxpayer had a present and existing community-property interest in 72.5% of her spouse's interest in the partnership. The court-approved settlement agreement recognized that interest; it didn't creat that interest. Therefore, regardless of whether the taxpayer was a partner in the partnership in 2003, the Court concluded that the general rule of federal income-tax law, that a married person filing separately must report half of the community income, applies in the taxpayer's case to the income the partnership earned. The Court also noted that credible arguments that might've been relevant to our analysis but that we don't consider because the parties failed to make them.
Tip of the Day
Gain or loss on tax-exempt bonds . . . The tax treatment of a sale of tax-exempt bonds may not be so simple. Any gain from market discount (bonds purchased in the market at less than the face amount; e.g., a $1,000 bond purchased for $850 has $150 of market discount), is usually taxable on disposition or redemption of the bonds. If you bought the bonds before May 1, 1993, the gain from market discount is capital gain. If you bought the bonds after April 30, 1993, the gain is ordinary income. The market discount is the difference between the price you paid for the bond and the sum of the original issue price of the bond and the amount of accumulated original issue discount, from the date of issue that represented interest to any earlier holders. A loss on the sale or other disposition of a tax-exempt bond is deductible as a capital loss.
March 6, 2014
The Treasury has released the General Explanations of the Administration's Fiscal Year 2015 Revenue Proposals. The proposals include simplification of the tax system, a number of proposals to reduce the tax gap and make reforms, loophole closers, expand the earned income tax credit and certain other tax cuts for families and individuals, provide tax relief for small businesses, and provide incentives for manufacturing and job creation. The proposal would also eliminate fossil fuel preferences such as the expensing of intangible drilling costs and percentage depletion.
Qualified pension plans, including ESOPs, can provide significant benefits to both employees and employers, but the rules must be carefully followed. In K.H. Co. LLC Employees Stock Ownership Plan (T.C. Memo. 2014-31) the Court sided with the IRS in finding that the plan was not amended timely or properly for certain statutory requirements, that a qualified appraiser was not used to value the securities in the ESOP, and that the plan was not operated within its own terms.
Tip of the Day
Change in life . . . Get married last year? Divorced? Addition to the family? Taking care of an elderly relative? Death in the household? Become unemployed? Retire? Start a business? Acquire a rental property? Send a child to college? Any of those changes (and others) require extra consideration on your tax return. If you're preparing your own return, check the Form 1040 instructions, IRS Publication 17, and any IRS publications specific to your situation. You can find a quick index at IRS Publications on our page. If you're using a paid preparer, make sure to mention the changes to him or her at the opening of your interview.
March 5, 2014
In President Obama's fiscal 2015 proposed budget one of the most significant changes would be a revamping of how S corporations that provide professional services are taxed with respect to employment taxes.
In Lisa Beamon Swint (142 T.C. No. 6) prior to marrying the taxpayer, her husband had a child with TDW. An agreed entry filed by a State court in February 1998 provided that the taxpayer's husband would be entitled to a dependency exemption deduction and a child tax credit for the child if he was current in his child support obligations. The agreed entry was not signed by the taxpayer's husband or TDW. The taxpayer and her husband filed a joint Federal income tax return for the taxable year 2009 claiming a dependency exemption deduction and a child tax credit. The IRS disallowed the taxpayer's claim for a dependency exemption deduction and a child tax credit. The Court held that Sec. 1.152-4(e)(1)(ii), of the Regulations, provides that for taxable years starting after July 2, 2008, a "court order or decree or a separation agreement may not serve as a written declaration." However, Reg. Sec. 1.152-4(e)(5), provides a carveout to this rule: If a written declaration was executed in a taxable year beginning on or before July 2, 2008, the courts look to the requirements for the form of a written declaration that were in effect at the time the written declaration was executed. At the time the agreed entry was filed in 1998 there was no prohibition on using a court order or decree or a separation agreement as a written declaration if the other requirements for a written declaration were met. The Court also held the agreed entry did not satisfy the requirements for the form of a written declaration in effect at the time the agreed entry was executed because it was not signed by the custodial parent and was not unconditional. Therefore, the taxpayer was not entitled to a dependency exemption deduction or a child tax credit for the child.
Tip of the Day
Now's the time for organizing . . . You may be finished or not yet started putting your tax information together. But after you've got all the receipts, bank statements, etc. and entered your data, take a little extra time to organize the information. Some of those receipts from the charitable contributions of clothing may be missing information--add it now. Don't just total the repair bills for the rental property and enter the info on the return. Take the time to enter them in a spreadsheet and add a description if it's not clear from the receipt. The $250 receipt from the home center may have items on it for your house as well as your rental. You remember what the paint was for now, but will you when you're audited two years from now. Worse, the cash register receipt from the hardware store may not even detail the items purchased. If you've got good receipts you'll make the IRS or state agent's job harder--he or she won't be able to disallow an item simply because its inadequately substantiated.
March 4, 2014
In Craig Patrick et ux. (142 T.C. No. 5) the taxpayer-husband received two monetary awards for bringing qui tam complaints filed under the False Claims Act (FCA). The taxpayers reported the awards as capital gains. The IRS issued a deficiency notice that disallowed capital gains treatment and characterized the awards as other income. The IRS contended that a qui tam award does not result from the sale or exchange of a capital asset, citing Sec. 1222(1), (3). The taxpayers argued that under the FCA the relator sells information to the Government in exchange for a share of any recovery. The taxpayers further argued that the right to receive a share of the recovery and the information provided to the Government each constitute a capital asset. The Court held a qui tam award is not the result of a sale or exchange as required under Sec. 1221(b)(3). The Court further held a qui tam award is ordinary income and is therefore not a capital asset under Sec. 1221(a) and the information the taxpayer provided to the Government was not his property and therefore was not a capital asset. Tip of the Day
Work-related education expenses . . . You may be able to deduct tuition, books, supplies, transportation, and related expenses for education to improve or maintain your job skills. But you can't deduct expenses that will qualify you for a new trade or business. If you're self-employed deduct the expenses on Schedule C; if you're an employee you deduct the expenses as a miscellaneous itemized deduction on Schedule A. What qualifies an individual for a new trade or business can be tricky. If the profession requires a license, such as a CPA, attorney, pilot, or even a licensed plumber, coursework and tests would generally not be deductible. On the other hand, a pilot who has a commercial license to fly charters in a piston aircraft might be able to deduct the cost of training in jet aircraft. Reimbursed by your employer? You can only deduct costs in excess of the reimbursement. And you can't deduct education expenses as a business expense on Schedule A or C and get a benefit for the same expenses under one of the education benefits (education credit or tuition and fees deduction).
March 3, 2014
Revenue Procedure 2014-17 (IRB 2014-12) modifies the procedures in Rev. Proc. 2012-20 and Rev. Proc. 2011-14 regarding certain changes in method of accounting for dispositions of tangible depreciable property. This revenue procedure supersedes Rev. Proc. 2012-20 and provides the procedures by which a taxpayer may obtain the automatic consent of the IRS to change to the methods of accounting provided in Secs. 1.167(a)-4 and 1.168(i)-7 of the Regulations, Sec. 1.167(a)-4T, 1.168(i)-1T, 1.168(i)-7T, and 1.168(i)-8T of the temporary regulations, and Secs. 1.168(i)-1, 1.168(i)-7, and 1.168(i)-8 of the proposed regulations. This revenue procedure also modifies Rev. Proc. 2011-14 and allows a late partial disposition election under Prop. Reg. Sec. 1.168(i)-8 or a revocation of a general asset account election under Sec. 1.168(i)-1T or Prop. Reg. Sec. 1.168(i)-1 to be treated as a change in method of accounting for a limited period of time. Finally, this revenue procedure modifies section 6.01 of the APPENDIX of Rev. Proc. 2011-14 to waive a scope limitation in certain circumstances.
The IRS recently posted updated list of Questions and Answers on the Net Investment Income Tax.
The IRS announced that Christopher B. Berg of Portola Valley, Calif., was sentenced to one year and one day in prison to be followed by three years supervised release. Prior to sentencing, Berg paid restitution to the IRS of more than $250,000 as well as a penalty of $287,896 for failure to properly report his foreign account. Berg previously pleaded guilty to willfully failing to file the required report of foreign bank account for an account he controlled in 2005 at UBS in Switzerland that had a balance over $10,000. According to court documents, Berg began working as a consultant in 1999. Beginning in 2001 and continuing through 2005, he used wire transfers to deposit $642,070 in earned income into UBS accounts. Berg used money in these Swiss UBS accounts to purchase a vehicle, to obtain cash while in Europe and to pay the balance on a Eurocard he used while traveling in Europe. Berg did not disclose the existence of his accounts at UBS in Switzerland to his CPA, and also failed to disclose the income earned by these accounts or the consulting income deposited to the accounts. The tax harm associated with Berg's conduct exceeded $250,000.
Tip of the Day
Retired last year? . . . There are sure to be a number of changes in your income tax situation. If you have you use a professional be sure to tell him of your change in status. The changes on your return will range from noting your "retired" status for the occupation question to including a portion of your Social Security benefits in your income. You should be careful to check the rules in your state. A number of states provide at least a partial exclusion for pension income. Made nondeductible IRA contributions in the past? Use Form 8606 to determine the taxability of distributions for federal purposes. If your income is significantly lower you may be able to take advantage of benefits you couldn't in the past. For example, your medical expenses may be deductible because of the lower threshold. If you're using computer software to prepare your return and don't override any entries, the program should handle the details.
February 28, 2014
The discussion draft released by the Chairman Camp of the House Ways and Means Committee would also make changes to business taxes. Corporations would see a single 25% rate, rather than the graduated rate. The rate would be phased in through a 2-percentage point annual reduction. The research credit would be pegged at 15 percent of qualified expenditures that exceed 50 percent of the average qualified research for the prior three year. The simplified research credit would not be abandoned. The domestic production activities credit (Sec. 199) would be phased out. Depreciation rules (MACRS) would be repealed so that depreciation lives more closely match economic useful asset lives. Bonus depreciation and a number of other special depreciation provisions would end. Section 179 would still be available with a maximum writeoff of $250,000. Advertising expenditures would no longer be fully deductible. A portion would have to be capitalized and amortized. The proposal would generally allow the cash method of accounting for businesses with annual gross receipts of $10 million or less. The proposal would not change the rules for flow-through entities, i.e., LLCs, partnerships, and S corporations.
The Joint Committee on Taxation has published the Technical Explanation of the Tax Reform Act of 2014, A Discussion Draft of the Chairman of the House Committee on Ways and Means to Reform the Internal Revenue Code. You can find the complete text at https://www.jct.gov/.
The IRS has released some statistics on the filing season to date. Of interest is that the total number of returns processed is up 12.8% over last year at this time. E-filing is up by 1.1% but e-filing by tax professionals is down by 3.6%. Self-prepared returns are up by 6.9%. Visits to the IRS.gov are down by 6%.
The IRS has posted the final instructions to Form 8960 to IRS.gov. Other recent posts include:
Tip of the Day
IRA trustees' fees . . . Trustees' administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. However, they may be deductible as a miscellaneous itemized deduction on Schedule A of Form 1040. Brokers' commissions are part of your IRA contribution.
February 27, 2014
The IRS has issued final regulations (T.D. 9659) relating to property transferred in connection with the performance of services under Section 83. Section 83 addresses the tax consequences of the transfer of property in connection with the performance of services. These final regulations provide several clarifications regarding whether a substantial risk of forfeiture exists in connection with property subject to Section 83. Specifically, the final regulations clarify that (1) except as specifically provided in Section 83(c)(3) and Secs. 1.83-3(j) and (k), a substantial risk of forfeiture may be established only through a service condition or a condition related to the purpose of the transfer, (2) in determining whether a substantial risk of forfeiture exists based on a condition related to the purpose of the transfer, both the likelihood that the forfeiture event will occur and the likelihood that the forfeiture will be enforced must be considered, and (3) except as specifically provided in Section 83(c)(3) and Secs. 1.83-3(j) and (k), transfer restrictions do not create a substantial risk of forfeiture, including transfer restrictions that carry the potential for forfeiture or disgorgement of some or all of the property, or other penalties, if the restriction is violated.
The Chairman of the House Ways and Means Committee, Dave Camp, R-Mich., has released an outline of his tax proposals. There would be two tax rates, 10% and 25% with a 10% surtax on taxpayers with modified adjusted gross income (MAGI) in excess of $450,000 (married, joint) and $400,000 for single individuals. There would be a cutback in deductions--no state and local tax deduction, interest on home mortgages with principal amounts up to $500,000 (rather than $1 million)--but they'd be a larger standard deduction and no personal exemption. The 10% bracket would include taxable income up to $74,800 (2015 estimate) for a married couple; the 25% bracket would apply to income above that. The breakpoint for single individuals would be half that amount. Dividends and long-term capital gains would be taxed at ordinary income rates with 40% of the income excluded. A portion of 401(k) contributions would be taxed upfront but excluded from income when distributed. Clearly it's early and some Democrats in the Senate have already dismissed the proposal.
Tip of the Day
Retirement Savings Contributions Credit . . . Make a contribution to an IRA, 401(k) or certain other retirement plans and you could get a substantial credit. The catch? The credit is phased out and disappears completely for single taxpayers with AGI of more than $29,500 or married (filing joint) taxpayer with more than $59,000. Other requirements? You can't have been a student during the year, you must have been born after January 1, 1996, and you can't be claimed on someone else's return. That narrows the field considerably. But if you can qualify--you were out of work for part of the year, your business did poorly, etc.--you may be able to max out the benefit by making a $2,000 contribution to a deductible IRA and get a $1,000 tax credit. There may not be another tax benefit that gives you that much bang for the buck.
February 26, 2014
Revenue Procedure 2014-21 (IRB 2014-11) provides the depreciation deduction limitations for owners of passenger automobiles and trucks and vans) first placed in service during calendar year 2014 and the amount to be included in income by lessees of passenger automobiles first leased during calendar year 2014. These depreciation deduction limitations and income inclusion amounts are updated annually pursuant to Section 280F to reflect the automobile price inflation adjustments. We've updated our Vehicle Depreciation Limits table. The lease inclusion amount tables will be updated shortly.
In Tax Tip 2014-19 the IRS is warning taxpayers about scams that use email and phone calls that appear to come from the IRS are common these days. These scams often use the IRS name and logo or fake websites that look real. Scammers often send an email or call to lure victims to give up their personal and financial information. The crooks then use this information to commit identity theft or steal your money. Some call their victims to demand payment on a pre-paid debit card or by wire transfer. But the IRS will not initiate contact with you to ask for this information by phone or email, If you get this type of ‘phishing’ email, the IRS offers this advice:
If you get an unexpected phone call from someone claiming to be from the IRS:
Be alert to scams that use the IRS as a lure. The IRS will not initiate contact with you through social media or text to ask for your personal or financial information.
The IRS has begun publishing "Health Care Tax Tips" in connection with the Affordable Care Act. The first ones include The Premium Tax Credit, The Individual Shared Responsibility Payment, and IRS REminds Individuals of Health Care Choices for 2014. Go to Health Care Tax Tips for the list.
The IRS has posted Retirement Plans FAQs regarding the EP Team Audit (EPTA) Program to IRS.gov. The FAQs are designed to help employers (and their advisers) that are going through an Employee Plans Team Audit (EPTA) audit or are concerned about going through one in the future. At this time the audits are aimed at employers that maintain qualified pension plans with at least 2,500 participants.
Tip of the Day
Reducing your audit chances . . . There are many reasons your return may be picked for an audit. Some may be obvious, such as very high charitable contributions or mortgage interest, others are more subtle and aren't divulged by the IRS or state. But one reason that can be a factor in any type of tax audit (federal income, employment taxes, sales taxes, etc.) is failing to file and/or habitually filing late. In some cases you may be able to explain a failure to file and avoid an audit (you probably won't avoid penalties) by promptly answering correspondence from the taxing agency.
February 25, 2014
The IRS has issued corrections to a withdrawal of notice of proposed rulemaking and notice of proposed rulemaking (REG-130843-13) that was published in the Federal Register on Monday, December 2, 2013, providing guidance on the computation of net investment income.
The IRS announced (IR-2014-18) the release of its IRS Criminal Investigation (CI) Annual Report for fiscal year 2013, reflecting significant increases in enforcement actions against tax criminals and a robust rise in convictions, including identity theft. CI investigates potential criminal violations of the Internal Revenue Code and related financial crimes in a manner to foster confidence in the tax system and compliance with the law. High points of fiscal year 2013 include a 12.5 percent increase in investigations initiated compared to the prior year and a nearly 18 percent gain in prosecution recommendations. Specifically, CI initiated 5,314 cases and recommended 4,364 cases for prosecution. These increases were accomplished at a time when agent resources decreased more than 5 percent. Meanwhile, convictions rose more than 25 percent compared to the prior year. The conviction rate for fiscal 2013 was 93 percent. CI continues to play a vital role in the fight against identity theft. CI initiated over 1,400 investigations and recommended prosecution of over 1,250 individuals who were involved in identity theft crimes during fiscal 2013.
Tip of the Day
Buy or sell a business in 2013? . . . Both the buyer and the seller of a group of assets that makes up a trade or business must attach Form 8594 to report such a sale if goodwill or going concern value attaches, or could attach, to such assets and if the purchaser's basis in the assets is determined only by the amount paid for the assets. Most small businesses are sold through the sale of assets. You can be liable for penalties for failure to file the form by the due date (including extensions).
February 24, 2014
The IRS has issued final regulations (T.D. 9656) that implement the 90-day waiting period limitation under section 2708 of the Public Health Service Act, as added by the Patient Protection and Affordable Care Act (Affordable Care Act), as amended, and incorporated into the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. These regulations also finalize amendments to existing regulations to conform to Affordable Care Act provisions. Specifically, these rules amend regulations implementing existing provisions such as some of the portability provisions added by the Health Insurance Portability and Accountability Act of 1996 (HIPAA) because those provisions of the HIPAA regulations have become superseded or require amendment as a result of the market reform protections added by the Affordable Care Act. The 90-day waiting period limitation provisions of these final regulations apply to group health plans and group health insurance issuers for plan years beginning on or after January 1, 2015. The amendments made by these final regulations to the evidence of creditable coverage provisions apply beginning December 31, 2014. All other amendments made by these final regulations apply to group health plans and health insurance issuers for plan years beginning on or after April 25, 2014.
Tip of the Day
IRA deductions . . . For 2013, the limit for an IRA contribution is $5,500 or $6,500 if you were age 50 or old before 2014. (The limits apply to any combination of traditional and Roth IRAs.) The contribution for 2013 to either a traditional or Roth IRA must be made by the due date of your return (April 15). Extensions don't count. And there are AGI restrictions for Roth IRAs--a phaseout starts at $178,000 if you're filing married, joint or $112,000 if you're filing single or head of household. Contributions to a deductible traditional IRA are phased out if you're covered by a pension plan and your AGI is more than $95,000 (married, joint) or $59,000 if you're filing as single or head of household. You're tax preparation software should lead you through the limitations.
February 21, 2014
It appears that House Ways and Means Committee Chairman Dave Camp, R-Mich., may be on the verge of releasing his tax reform proposals. On the other hand, Senate Finance Committee Chairman Ron Wyden, D-Ore., appears to be more interested in the tax extenders. And many professionals now feel the chances for tax reform in 2014 are slim.
Revenue Procedure 2014-19 (IRB 2014-10), corrects Revenue Procedure 2014-4, which contains errors regarding expedited handling of EO Determination Letter requests in sections 2.06 and 9.03(3). This revenue procedure corrects those errors to clarify that EO Determination Letters are still eligible for expedited handling under section 9 of Revenue Procedure 2014-4.
In Boyd J. Black, et ux. (T.C. Memo. 2014-27) the taxpayer borrowed against his life insurance policy but failed to repay the loans. The policy was terminated, and the loans were satisfied by policy proceeds and extinguished. The IRS contended that the amount realized upon termination of the policy includes both loan principal and capitalized interest. The taxpayers contended that the amount realized includes only loan principal. The Tax Court held the capitalized interest that accrued on the loans against the life insurance policy is includible in determining the gross distribution and the taxable amount arising from the termination of the policy. The Court also held the taxpayer liable for the accuracy-related penalty.
Tip of the Day
Two homes qualify for home exclusion . . . To qualify for the exclusion of $250,000/$500,000 gain on the sale of your home it must be your main home for two out of five of the preceding years. That could result in two homes qualifying for the exclusion. For example, during the previous five years you lived in a home in New York for two years and a home in Florida for three years. You sell both in the same year. Both homes qualify, but you can only exclude the gain on one.
February 20, 2014
In Estate of Helen P. Richmond et al. (T.C. Memo. 2014-26) at the time of her death, the decedent owned a 23.44% interest in a family-owned personal holding company ("PHC"), whose assets consisted primarily of publicly traded stock. The decedent's estate tax return reported the fair market value of her interest in PHC as $3,149,767, using a capitalization-of-dividends method to value the asset. The IRS used instead a net asset value ("NAV") method and determined a deficiency in the estate tax as well as an accuracy-related penalty. The Court held the NAV method is a better measure of the value of the publicly traded stock. The Court allowed a deduction for built-in capital gains (based on the present value of the built-in capital gain), a discount for lack of control of 7.75% and a marketability discount of 32.1%. The Court held the estate liable for the 20% accuracy-related penalty.
Trusts can serve a legitimate purpose and be respected for income tax purposes. But trusts have been set up and used in attempts to avoid taxes or shift the taxes to another party. You can't structure a paper entity to avoid tax when that entity is without economic substance. And a trust, though valid under state law, may be treated as a nullity for Federal income tax purposes if it lacks economic reality. In Christopher Carl Close et ux. (T.C. Memo. 2014-25) the taxpayer along with other parties purchased rural land and put the properties in two trusts. The trusts produced income and the IRS claimed the trusts were shams and the income should be reported differently. The Court examined the two trusts using the four-factor test it applied in an earlier case. The factors are the relationship to the trust before and after formation, whether trustees are independent, whether an economic interest passed to the trust beneficiaries, and whether the taxpayer disregarded restrictions imposed by the trust agreement. Here the Court found that the evidence support the fact the trusts were not shams.
Tip of the Day
Holding periods . . . To compute how long you've owned real property bought under an unconditional contract, begin counting on the day after you received title to it or took possession. However, taking delivery or possession of real property under an option agreement is not enough to start the holding period. The period can't start until there is an actual contract of sale. The holding period of the seller cannot end before that time.
February 19, 2014
The IRS has released a user-friendly toolkit as a guide to audits involving transfer pricing. You can download the Transfer Pricing Audit Roadmap at www.irs.gov/pub/irs-utl/FinalTrfPrcRoadMap.pdf.
Want income statistics for your county? Get them from the IRS. The Service has just released the information from 2011 income tax returns. The statistics include the number of returns by AGI group, as well as self-employment income, dividend income, number of farm returns, contributions, etc. The information can be downloaded in Excel or CSV format. Go to www.irs.gov/uac/SOI-Tax-Stats-County-Data-Downloads.
Tip of the Day
Related party sales . . . If you sell an item of property to a related party (e.g., sister, half-brother, parents, children, corporation where you own more than 50% of the stock) the tax consequences can be very different than if you sold the same item to an unrelated party. Gain that would be capital gain to an unrelated party may be taxed as ordinary income and a loss may not be deductible. Talk to your tax advisor about your specific situation.
February 18, 2014
In Shea Homes Inc. et al. (142 T.C. No. 3) the corporation and partnerships Shea Homes LP (S) and Vistancia LLC (V) owned by it develop large, planned residential communities. They develop the land and construct homes and common improvements, including amenities. For the years at issue they reported income from their contracts for the sale of homes using the completed contract method of accounting. Under their interpretation of this method of accounting, their contracts are complete when they meet the use and 95% test pursuant to Reg. Sec. 1.460-1(c)(3)(A), and incur 95% of the costs of the development. They contended that final completion and acceptance pursuant to Reg. Sec. 1.460-1(c)(3)(B), does not occur (after excluding secondary items, if any, pursuant to Sec. 1.460-1(c)(3)(B)(ii)) until the last road is paved and the final bond is released. The IRS sought to place the corporation, S, and V on its interpretation of the completed contract method. The IRS contended that the subject matter of the contracts of the corporation, S, and V consisted only of the houses and the lots upon which the houses are built. Under the IRS's interpretation, the contract for each home met the final completion and acceptance test upon the close of escrow for the sale of each home. The IRS also alleged that contracts entered into and closed within the same taxable year are not long-term contracts under Sec. 460. The Court held the subject matter of the contracts consists of the home and the larger development, including amenities and other common improvements. The Court also held that the corporation, S, and V were permitted to report income and losses from sales of homes in their planned developments using their interpretation of the completed contract method of accounting.
In a news release, the IRS announced that there are no major issues with tax refunds or processing at this time. The IRS noted 90% of the refunds are issued to taxpayers in less than 21 days after the IRS receives the return. A very small percentage of taxpayers may see an "1121" reference number if they check "Where's My Refund?" after they initially were provided a projected refund date by the tool. The IRS is aware of this situation, and emphasizes that the small group of taxpayers who see this reference number should continue checking Where's My Refund for an update. If the Service needs more information to process their return, it will contact you--usually by mail. The IRS works hard to issue refunds as quickly as possible, but as part of its effort to prevent improper payments some tax returns take longer to process than others for many reasons, such as when a return includes errors, is incomplete, or needs further review. The web and phone tools are updated just once a day so checking more often won't help. The IRS also noted the phone and walk-in representatives can only research the status of a refund if it's been 21 days or more since the return was filed electronically, more than 6 weeks since a paper return was mailed, or if Where's My Refund? directs a taxpayer to contact the Service as in the case of those who see the 1121 reference number. The IRS emphasized that the 1121 reference number does not mean you're being audited.
Tip of the Day
Electronic return originators and preparer penalties . . . In a legal memorandum (ILM 201407013) the IRS provided guidance on when preparer penalties to electronic return originators (EROs). Issues addressed include sharing of EFINs, preparation of returns at locations other than the business location of the ERO on Form 8633, due diligence requirements for EROs, etc.
February 14, 2014
In R. Ball et ux. (U.S. Court of Appeals, Third Circuit) the appeal arose out of nine consolidated cases before the Tax Court regarding the tax implications of an S Corp.'s election to treat its subsidiary as a "qualified subchapter S subsidiary" ("Qsub") under Sec. 1361. Specifically, the taxpayers and the IRS disagree as to whether the Qsub election and subsequent sale of the S Corp. parent creates an "item of income" under Sec. 1366(a)(1)(A) thereby requiring the parties who held stock in the parent S Corp. to adjust their bases in stock under Sec. 1367(a)(1)(A). The Court affirmed the decision of the Tax Court (T.C. Memo. 2013-39) finding an increase in stock bases and declared losses to be improper.
The IRS announced that Abdelhamid M. Horany, 58, of Denver, pleaded guilty in U.S. District in Denver to one count of tax evasion related to his 2007 individual income taxes. As part of his plea, Horany admitted that he owned and operated Euphrates Pizza, doing business as Famous Pizza, in Denver from at least 2003 through 2007. He further admitted to willfully underreporting the income he received from his business by approximately $175,000 on his 2007 income tax return, which resulted in Horany underreporting his tax due and owing by over $60,000 for 2007. In total, for tax years 2005 through 2007, Horany admitted that he underreported his tax due and owing by more than $145,000. Horany further admitted to making false statements to an IRS Revenue Agent regarding his tax liabilities. According to court documents, Horany was indicted in July 2012 after he had fled the United States to his native country of Jordan, and was arrested in October 2013 when he returned on a flight and was ordered detained as a flight risk. Sentencing was set for May 8, 2014, when Horany faces a statutory maximum sentence of five years in prison, a $250,000 fine and three years of supervised release. In addition, according to the plea agreement, he has agreed to pay restitution to the IRS in the amount of at least $195,280.
Tip of the Day
President's Day Holiday . . . It's one of the busiest times for IRS phone lines according to a recently released Tax Tip by the IRS. The IRS is suggesting you go to IRS.gov first. In the same tip the IRS said it will issue most refunds in less than 21 days. To check the status of your refund, go to Where's My Refund. For more Tax Tips go to Current Tax Tips.
February 13, 2014
Following the issuance of final regulations on the Employer Shared Responsibility provisions under Section 4980H of the Code, the IRS has released an FAQ on the basics of the provisions. Go to Questions and Answers on Employer Share Responsibility Provisions Under the Affordable Care Act for the full text.
Tip of the Day
Small Business Health Care Credit . . . It's a credit of up to 35% of an employer's share of an employees' health insurance premiums. Basically, you may be entitled to the credit if you provided health insurance for your employees, you had 25 or fewer full-time equivalent employees and you paid average annual wages for the year of less than $50,000 per full time equivalent employee. For more information and a helpful calculator, go to the Taxpayer Advocate Service.
February 12, 2014
The IRS has issued final regulations (T.D. 9655) providing guidance to employers that are subject to the shared responsibility provisions regarding employee health coverage under Section 4980H of the Code, enacted by the Affordable Care Act. These regulations affect employers referred to as applicable large employers (generally meaning, for each year, employers that had 50 or more full-time employees, including full-time equivalent employees, during the prior year). Generally, under section 4980H an applicable large employer that, for a calendar month, fails to offer to its full-time employees health coverage that is affordable and provides minimum value may be subject to an assessable payment if a full-time employee enrolls for that month in a qualified health plan for which the employee receives a premium tax credit. The employer mandate for employers with 100 or more full-time employees begins January 1, 2015; for businesses with 50 to 99 full-time equivalent employees the mandate applies beginning January 1, 2016.
The U.S. Court of Appeals for the D.C. Circuit has affirmed a District Court decision in Sabina Loving et al. that held the return preparer regulations invalid. The Court did not accept the IRS's position that it could regulate return preparers.
Tip of the Day
Depositing taxes on time . . . Don't wait till the last minute to make a deposit. Generally, for deposits made by EFTPS to be on time, the deposit must be initiated by 8 p.m. Eastern time the day before the date the deposit is due.
February 11, 2014
In Tripp Dargie et al. (U.S. Court of Appeals, Sixth Circuit) the taxpayer enrolled as a student at the University of Tennessee College of Medicine (UT). In 1994, he entered into a Conditional Award Agreement ("the Agreement") with UT and MTMC that provided that MTMC would pay the taxpayer's tuition, fees, and other reasonable expenses for attending UT. After graduation and the completion of his residency, the taxpayer was required to repay MTMC's grant by either (1) working as a doctor in the medically underserved community of Murfreesboro, Tennessee, for four years or (2) repaying "two (2) times the uncredited amount of all conditional award payments" he received or a lesser amount agreed to by UT. During the taxpayer's time in medical school, MTMC paid UT $73,000 on the taxpayer's behalf as part of the Agreement. The taxpayer decided not to work as a doctor in Murfreesboro. In 2002 he repaid $121,440.22, twice the principal he received plus interest. The taxpayer filed an amended return claiming the full amount on his Schedule C. The IRS disallowed the amount. A U.S. Magistrate Judge granted summary judgment to the IRS, finding that the taxpayer's repayment of the funds was a personal expense and, regardless, no deduction would be allowed under Sec. 265(a)(1) because the repaid amount was allocable to income the he had received tax-free. The taxpayer asserted the payment was a "damages payment" for breaching the agreement and that it was an ordinary and necessary business expense because it enabled him to pursue his for-profit medical practice. The IRS contended the payment did not qualify as a deduction because educational expenses that allow an individual to meet the minimum requirements for practicing a given profession are personal. To determine whether an expense is a non-deductible personal expense or a deductible business expense, courts look to "the origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer." Thus, the circumstances under which the taxpayer received the money determine its business or personal characterization, not the circumstances under which he repaid it. The Court upheld the District Court decision denying the deduction.
Tip of the Day
Real estate taxes on property purchase . . . If you pay real estate taxes the seller owed on property you purchase and the seller did not reimburse you, the taxes increase your basis in the property. They're not deductible. On the other hand, if you reimburse the seller for taxes he paid for you, you can deduct the amount as an expense in the year of purchase. For example, the seller paid taxes for the second half of 2013 on July 1 in the amount of $1,200. You purchase the property on September 1 and reimburse the seller for the taxes for the last four months of 2013 (September through December). The $800 ($200 per month) would be deductible as real estate taxes. The seller can only deduct the taxes for the two months (July and August) during which he owned the property.
February 10, 2014
Just because you were able to trust your advisor in the past doesn't mean you can continue to do so. You should always have a healthy concern. In Gail Ardito v. Dept. of Treasury (U.S. District Court, District of Massachusetts), the taxpayer had a business and used the same CPA for 25 years. Approximately ten years ago, the accountant began preparing fraudulent returns for clients by fabricating returns to produce higher refunds. He substantially understated the taxpayer's gross receipts. The taxpayer incurred thousands of dollars in fees for tax and legal help in redoing her S corporation and individual tax returns for the years 2007 through 2010 and for interest and penalties applied to her underpayments. She charged the IRS with negligence and failing to give her "deserved" penalty abatements. According to the taxpayer, the IRS was negligent in 1) knowing of the accountant's fraudulent conduct without correcting it or warning the taxpayer, losing certain of the taxpayer's resubmitted returns and being unresponsive to her attempts to repair her accountant's mishandling of her taxes, and, possibly, licensing and regulating malfeasant tax professionals such as her accountant. The taxpayer declared that this was not a tax or penalty issues, but a negligence and mismanagement issue. The Court found more than one problem with the taxpayer's complaints. But, because the taxpayer did not show that she exhausted her administrative remedies prior ot filing her Complaint, the Court did not have jurisdiction over the matter. Moreover, the taxpayer failed to state a claim.
Tip of the Day
Child credit . . . You can get a credit of $1,000 for each qualifying child, but the child must meet certain requirements. If you enter all the required information in your tax software, the program should take the credit automatically. The qualifying child must be a son, daughter, stepchild, brother, sister, grandchild, etc., under the age of 17 at the end of 2013, claimed as a dependent on your return, a U.S. citizen, national, or resident. In addition, the child cannot have provided his or her own support for the year, must have lived with you for more than half the year, and cannot have filed a joint return. If the software doesn't have all that info, it won't take the credit.
Copyright 2014 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. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. 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