Small Business Taxes & ManagementTM--Copyright 2017, A/N Group, Inc.
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August 23, 2017
NewsFEMA (Federal Emergency Management Agency) has reported that as a result of a severe winter storm and snowstorm from March 14 to 15, 2017 in parts of New York State, taxpayers who sustained losses as a result of the disaster may deduct the losses on their 2016 or 2017 returns. The affected counties are Albany, Broome, Chenango, Clinton, Columbia, Cortland, Delaware, Dutchess, Essex, Franklin, Fulton, Greene, Hamilton, Herkimer, Madison, Montgomery, Oneida, Orleans, Otsego, Rensselaer, Saratoga, Schenectady, Schoharie, Suffolk, Sullivan, Tioga, Tompkins and Ulster.
The IRS has provided guidance on the tax treatment of settlement payments made to some homeowners in Carson, Calif. to remediate their homes from petroleum contamination. Responding to a request for guidance, IRS Commissioner John Koskinen described how homeowners in the Carousel Tract should report payments they receive from the Shell Oil Company on their federal income tax return. While their homes are being remediated, these homeowners have been relocated to fully-furnished apartments with full kitchens, paid for by Shell. Additionally, they have received per-diem payments and inconvenience fees from the company. For additional information, go to IRS Explains Tax Treatment of Settlement Payments to Some Carson Homeowners.
An ordinary deduction reduces income dollar-for-dollar, but a capital expense only offsets capital gain. In Gregory Alan Hann et ux. (U.S. Court of Federal Claims) the taxpayers petitiioned the Court to recharacterize as an ordinary expense the underwriters' commission paid by the husband in connection with his participation in his employer's initial public offering. The Court held that once he exercised the stock options he held, he became a shareholder. Thus, the commission was properly characterized as a capital expense because it was paid to sell a capital asset.
Tip of the DayDividends or interest? . . . Interest rates should be increasing--but probably only on loans, not deposits. For several reasons, it's unlikely that interest rates on bank deposits will rise to the levels we were accustomed to in the past. And there's a good chance they won't even keep up with inflation. There are other options, but you've got to be willing to accept some risk. There are currently still many high quality stocks that pay dividends yielding 2-percent or more. If that sounds less than enticing, dividends are taxed at 15% for most taxpayers and 0% for taxpayers in the 10 or 15% tax bracket while interest is taxed at ordinary income rates. In addition, many of the best dividend paying companies have a track record of increasing their dividends over time. Thus, while your yield may be only 2% or 3% today, 10 years from now it could be 4% to 6%. And, there's a good chance the stock will go up over time. You can reduce your risk by investing in a fund or picking top quality companies. While dividend paying stocks tend to be less risky, they are still riskier than putting your money in a savings account. Stocks can go down. But if you've got time to wait out a bear market, you'll come out ahead. This is definitely not the place to park your emergency funds. Talk to your investment advisor.
August 22, 2017
NewsThe IRS has announced that farmers and ranchers who previously were forced to sell livestock due to drought in regions designated as eligible for federal assistance, like the drought currently affecting much of the nation, have an extended period of time in which to replace the livestock and defer tax on any gains from the forced sales. This relief generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, or poultry are not eligible. The 35 affected counties in North Dakota are: Adams, Barnes, Benson, Billings, Bowman, Burke, Burleigh, Dickey, Divide, Dunn, Emmons, Golden Valley, Grant, Hettinger, Kidder, LaMoure, Logan, McHenry, McIntosh, McKenzie, McLean, Mercer, Morton, Mountrail, Oliver, Pierce, Renville, Sheridan, Sioux, Slope, Stark, Stutsman, Ward, Wells and Williams. For the complete release on drought relief see Drought-Stricken Farmers and Ranchers Have More Time to Replace Livestock; Much of North Dakota Eligible. For details on how this provision of the tax law works, see Notice 2006-82.
Victims of the evere Storms, Flooding, Landslides, and Mudslides that took place beginning on July 28, 2017 in parts of West Virginia may qualify for tax relief from the Internal Revenue Service. The President has declared that a major disaster exists in the State of West Virginia. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in West Virginia will receive tax relief. Individuals who reside or have a business in Harrison, Marion, Marshall and Wetzel Counties may qualify for tax relief. For complete details go to Tax Relief for Victims of Severe Storms and Flooding in West Virginia .
Tip of the DayIRS levies on employee's wages . . . You may think it's unjust or you want not want to withhold amounts for an IRS levy on an employee's wages, but the penalty is substantial. Failure to withhold and pay the levy could subject you to a penalty equal to 50% of the amount recoverable. Worse, the penalty can't be used as a credit toward the taxpayer's liability. You can also be personally liable for an amount equal to the amount levied but not paid to the IRS or the amount of the tax liability, whichever is less.
August 21, 2017
NewsThe IRS has announced it will conduct annual Labor Day maintenance on numerous electronic systems beginning Saturday, Sept. 2 at 8:00 p.m. ET and ending Tuesday, Sept. 5 at 5:00 a.m. ET. The Transcript Delivery System, TIN Matching, e-file Application, ACA and Registration Services will not be operational during this timeframe. Users should refrain from accessing e-services to conduct business during this period.
Notice 2017-44 provides model amendments that a sponsor of a qualified defined benefit plan may use to amend its plan document to offer bifurcated benefit distribution options to participants in accordance with final regulations issued under § 417(e) of the Internal Revenue Code.
Tip of the DayQuestionable documents . . . Usually a birth certificate is enough to document your age. In a recent Tax Court Summary decision the taxpayer took a distribution from his IRA. When asked to prove he was 59-1/2 to avoid an early distribution penalty, the taxpayer secured a birth certificate from his birthplace, Kenya. While the record is silent on the reason, the IRS decided to check other sources. They found his driver's license, Form I-687, Application for Statusas a Temporary Resident, FBI fingerprint card, Application for Naturalizaton, petition for a name change filed with the U.S. District Court and a number of other sources showed his age as 2 years younger. The Court held he hadn't proved his age and, as a result the IRS's presumption of correctness held.
August 18, 2017
NewsThe scheduled outage of e-Services tools that was to take place beginning August 17 and end August 21 has been postponed to make additional changes. All e-Services functions will remain in operation until the until the new date is announced.
Business bad debts create an ordinary loss; nonbusiness bad debts a capital loss. To secure a business bad debt the debt the creditor must be in the business of loaning money or a part of another business such as carrying accounts receivable. In William C. Owens (T.C. Memo. 2017-157) the Court applied the factors the courts usually consider in determining whether a bona fide debt exists. It also looked at seven factors including the number of loans made, the amount of effort expended in the lending activity, relationship to the debtors, and the time period over which the loans were made to determine if the taxpayer was in the business of lending. The Court found the loans bona fide and the taxpayer in the trade or business of loaning money.
If you're claiming a net operating loss carryback or carryforward, you must be able to substantiate the amount. In Ann E. Dykstra (T.C. Memo. 2017-156) the taxpayer's claim for a carryback was denied for lack of documentation. In addition, her request to apply an overpayment from one year was denied because the statute of limitations had run. Finally, the Court found no fault in the IRS settlement officer (SO) determination that she could pay her outstanding liabilities, or at the lease a far larger proportion of the liabilities) and was correct in rejecting the taxpayer's offer in compromise and installment payment proposal.
Tip of the DayWinner turns into loser . . . There's an old saying "be careful what you wish for". That can often apply to business. Recently, a small business we know of put in a bid it knew was low to get a contract. The company won, but the job proved to be unprofitable and, in an effort to recover cut corners. The customer was not satisfied with the job and company was deemed ineligible to bid on a larger contract that was less technically challenging. Another business ended up in a bidding war with a competitor for the purchase of a small division of a major corporation. The business won, but not long after the deal closed the division lost two important contracts and was hit with a product liability suit. Even without those breaks, the business realized it overpaid for the division. Now it has cash flow problems and having a problem competing with its rival.
August 17, 2017
NewsThe Tax Court doesn't always get it right. In BC Ranch II, L.P., also known as Bosque Canyon Ranch II, L.P., BC Ranch I, Incorporated, Tax Matters Partner, Petitioners-Appellants v. Commissioner of Internal Revenue, Respondent-Appellee, Bosque Canyon Ranch, L.P., BC Ranch, Incorporated, Tax Matters Partner (U.S. Court of Appeals, Fifth Circuit) the Court vacated and remanded the Tax Court's decision (T.C. Memo. 2015-130) that disallowed a charitable deduction for conservation easements and wrongfully classified the sale of limited partnership interests as disguised sales and wrongfully imposed a gross valuation misstatement penalty. The Tax Court had found the easements were not in perpetuity, noting that a homesite boundary requirement could be modified under the agreement to include property within the original easement. But the amendments could only be made with the consent of the charitable organization and only the boundaries of the homesites could be changed and the total acerage could not be changed. The Appeals Court differentiated the current case from B.V. Belk.
The IRS has announced its not acquiescence in the holding of Estate of George H. Bartell, Jr. Deceased, George David Bartell and Jean Louise Bartell Barber, Co-Personal Representatives and Estate of Elizabeth Bartell, Deceased, George David Bartell and Jean Louise Bartell Barber, Co-Personal Representatives, et al. 147 (T.C. No. 5). In a like-kind exchange (Sec. 1031) the taxpayer used an exchange facilitator to acquire property before the taxpayer relinquished its property. The Tax Court held the intermediary was the owner of the property because it held legal title to the property, even though the taxpayer had the burdens and benefits of ownership and paid to have improvements made to the property.
Tip of the DayDon't abandon what works . . . Often a company comes up with a newer, better, or more profitable version of an existing product. Consider selling the older product at the same time, even if it cannabilizes sales of the new version. Should a defect be found you've got a fall back position. Some manufacturers have for years been introducing new technology in the their high-end products. That can be a great selling point and if problems are discovered chances and a recall is necessary, the volume involved will be smaller. You may have other options.
August 16, 2017
NewsThe House has not forgotten tax reform. They are working on a package and expect to have a several page document outlining the basics release in September.
There are three things to know about gambling winnings. One, the full amount is reportable on the front page of Form 1040 as income. Two, you can deduct your losses up to the amount of your winnings, but as an itemized deduction. Three, if you're claiming deductions for bets you've got to have some way to prove the amounts. In William Bon Viso et ux. (T.C. Memo. 2017-154) the taxpayer failed to report some of his winnings and claimed losses to offset the winnings, but the taxpayer failed to maintain adequate records and the Court had no basis for estiamting the amount. Furthermore, the taxpayers claimed the standard deduction and any losses would not be sufficient for their itemized deductions to exceed their standard deduction.
Tip of the DayState tax rules changing . . . Technology is changing the way many interstate companies do business and that's prompting changes in the state tax laws. Most of the press has gone to changes in the sales tax rules, but income tax rules are changing too. The biggest issue is nexus--a company's connection to the state. If the connection is very minor, such as simply shipping a product into the state after an online sale, the company isn't responsible for income tax. But sending in an engineer to repair the product may be enough to subject you to income tax. The rules vary widely. Stay up to date on the states where you have a business connection.
August 15, 2017
NewsGenerally, the IRS is presumed right and a taxpayer must show the IRS is wrong. However, the burden of proof is on the IRS in the case of fraud and the IRS must present clear and convincing evidence. In Margaret Knowles (T.C. Memo. 2017-152) the taxpayer liable for the civil fraud penalty for some of the years at issue. The Court noted the taxpayer filed as single even though she was married, repeatedly unreported her income and consistently overstated her deductions for business expenses. She failed to maintain records to substantiate her deductions. The Court noted that a pattern of overstating deductions is evidence of fraud. She was uncooperative during the audit process and testified she gave the IRS documents supporting her returns, but the agent credibly testified she did not. The record also included documents which were false.
It'd be nice to find a method of generating large losses to avoid taxes without losing the same amount in cash. More than a few taxpayers have been seeking that touchstone for many years. In BCP Trading and Investments, LLC, William T. Esrey Trading Partners, LP, a Partner other than the Tax Matters Partner (T.C. Memo. 2017=151) the participants used offsetting gambles on foreign currency to generate large tax losses in a Son-of-BOSS (bond and options sales strategy) transaction. There was more than one issue here but one of note was that the deal relied on a partnership which the Tax Court found to be a sham and disregarded it. The Court looked at the factors considered when determining the existence of a valid partnership and noted that the entire multifactor test turns on the fair and objective characterization of all the circumstances. The Court said it found was a scrupulous adherence to the formal requirements of making the entity look like a partnership, but a complete absence in its operating agreement and actual operations of any objective indication of a mutual combination for the present conduct of an ongoing enterprise.
Tip of the DayIRS summons . . . The IRS generally asks taxpayers for bank statements, canceled checks, credit card statements, etc. But if they are not forthcoming the will issue a summons to the bank, vendors, etc. Failure to provide the documents could prove embarassing when a loan officer or vendor you've been doing business with gets a summons for your records. Best to provide the records, or if necessary, ask the bank, vendor, etc. to provide you with copies that you can turn over to the IRS.
August 14, 2017
NewsA charitable contribution of a conservation contribution is generally limited to 50% of your basis in the property. There's an exception to the rule property used in agriculture or livestock production. In Mark A. Rutkoske, Sr., et al. a limited liability company (LLC) in which the taxpayers were members owned 355 acres of land (property) that it leased to others who used it as farmland. In 2009 LLC conveyed a conservation easement restricting the development rights on the property to a public charity, in exchange for $1,504,960. The taxpayers reported the bargain element of the transaction (allegedly $1,335,040) as a noncash charitable contribution. Following the conveyance of the development rights, the LLC sold its interest in the property to an unrelated party, for $1,995,040. On their respective income tax returns, the taxpayers classified themselves as “qualified farmers” within the purview of Sec. 170(b)(1)(E). A qualified farmer, defined as a taxpayer whose gross income from the trade or business of farming (as defined by I.R.C. sec. 2032A(e)(5)) is greater than 50% of his/her total gross income for the year, may deduct the value of a qualified conservation contribution of up to 100% of his/her contribution base for the year of contribution. I.R.C. sec. 2032A(e)(5) sets forth specific activities that constitute the trade or business of farming. The taxpayers maintained that the proceeds from the sale of the property, as well as the proceeds from the sale of development rights attached thereto, while not specifically listed in Sec. 2032A(e)(5), constitute income from the trade or business of farming. The Court held that pursuant to Reg. Sec. 1.703-1(a)(2)(iv) the taxpayers are treated as having directly conveyed the conservation easement to the charity. It also held the taxpayers were not “qualified farmers” within the purview of Sec. 170(b)(1)(E). Neither the sale of the property nor the sale of development rights attached thereto constitutes an activity that is included in the trade or business of farming as defined by Sec. 2032A(e)(5). Finally, the taxpayers are limited by Sec. 170(b)(1)(E)(i) to a charitable contribution deduction of 50% of their respective contribution bases with respect to the conveyed conservation easement.
The IRS is reminding truckers and other owners of heavy highway vehicles that, in most cases, their next federal highway use tax return is due August 31, 2017. The deadline generally applies to Form 2290 and the accompanying tax payment for the tax year that begins July 1, 2017, and ends June 30, 2018. Returns must be filed and tax payments made by Aug. 31 for vehicles used on the road during July. For vehicles first used after July, the deadline is the last day of the month following the month of first use.
Tip of the DayUse caution with competitors . . . Your company is still tiny but making a name for itself. You've got a great idea that is spot on. You're approached by Mega Inc. about a potential deal. Flattered, and thinking they might want to buy you out so you and your partner can retire at 25, you discuss some of your methods and ideas. A few months later you find you've just created your biggest competitor. It's happened--and more than once. If they're serious about a buyout or investment, get it in writing. You'll need an attorney qualified in the field to draft the documents and advise you. This is not the time to go online for a DIY approach. And make sure all employees who have inside knowledge sign nondisclosure and noncompete agreements.
August 11, 2017
NewsThe general rule is that to deduct an expense you've got to have proof of payment such as a credit card receipt, check, etc. and and invoice or other documentation showing the nature of the expense. In Stephen Drah (T.C. Memo. 20178-149) the Tax Court noted the taxpayer provided no documents or testimony to such he actually incurred expenses for contract labor or to show they were ordinary and necessary to the business. The Court also noted the truck he took depreciation on was not owned by him, but leased. The taxpayer presented invoices from auto repair shops to document repair and maintenance expenditures for various vehicles. But he provided no substantiation to show the invoices were paid and none of the invoices indicate that payment was made. In fact, the Court said that some of the documents may represent estimates where the work was not performed. Moreover, it wasn't clear on what vehicle the work was performed on. The Court denied his vehicle repair expenditures.
Tip of the DayDriving less? . . . You may be able to get a break on your auto insurance. One company puts the breakpoint at 7,500 miles per year. Check with your carrier. The savings will depend on several factors, but generally worth the effort. While you're at it, talk to your agent about other potential savings. If you've kept your vehicle longer than in the past, it may be time to drop collision insurance. In extreme cases it might make sense to take the car off the road or sell it. For example, you're no longer commuting to that job in the city. You may not need that second or third car. Review your options.
August 10, 2017
NewsAny "responsible person" at a business can be held personally liable for failing to deposit employment taxes. In Jon R. Hartman (U.S. District Court, E.D. Michigan) the petitioner was a 50-percent owner CEO of a company. The company had used an payroll service but was dropped by the provider when the company was unable to fund the deposit for the taxes. The petitioner had trusted his partner to pay the taxes, but discovered accounting irregularities and when through his partner's desk and discovered the checks for the deposits were never sent. On Form 4180 (which documented an interview with the IRS) the petitioner admitted, among other things that he determined financial policy for the busienss, directed or authorized the payment of bills, authorized or signed payroll checks, and authorized or made Federal Tax Deposits. He also admitted that while the delinquent returns were ncreasing, he authorized the payment of certain company financial obligations including payroll, utilities, rent, supplies, etc. The Court cited the factors used to consider whether a party is responsible and noted that liablity requires the existence of only significant as opposed to absolute control of the corporation's finances. The Court also found the petitioner acted willfully, noting that willful conduct may also incloude a reckless disregard for obvious or known risks.
In Gerald Wroblewski, et al. (U.S. District Court, S.D. California) the taxpayers had outstanding liabilities that the IRS sought to recover. The taxpayers submitted separate offers in compromise to the IRS for the years in question. The IRS accepted the offers, but subsequently revoked and rescinded its acceptance of the offers and demanded the balance of their liabiliites. The taxpayers alleged that in unilaterally revoking and rescinding its acceptance of their offer, the IRS violated Sec. 7122 and that they are entitled to damages under Sec. 7433. The IRS argued that the Court did not have jurisdiction because the taxpayers had not exhausted their admnistrative remedies. The Court noted the taxpayers had not filed any administrative claims related to the allegations and did not exhaust their administrative remedies and that, as a result, the Court did not have subject matter jurisdiction.
Tip of the DayEstimated taxes and S corporations . . . Generally, an S corporation doesn't pay taxes. The income and losses are passed through to the shareholders and reported on their individual returns. But when is the income of the S corporation income to the shareholder for estimated tax purposes? That is, if the shareholder's share of S corporation earnings for the first 3 months of the year is $50,000, must the shareholder take that amount into income when computing his or her estimated taxes? The answer is that you have to use the quarterly income of the S corporation for estimated tax purposes. That means you've got to get information from the S corporation on a regular basis. The other, simpler, alternative is to base your estimated taxes on last year's liability. That is, pay in each quarter an amount equal to one-fourth of last year's liability. That's not only simpler, it's a smarter move if your income this year is higher than last. However, if this year's income is lower, annualizing this year's income each quarter will result in lower estimated payments.
August 9, 2017
NewsThe IRS is required by law to notify taxpayers of their rights when requesting an extension of the statute of limitations for assessing additional taxes and penalties. Taxpayers might be adversely affected if the IRS does not follow the requirements to notify both the taxpayers and their representatives of the taxpayers’ rights related to assessment statute extensions. The Treasury Inspector General for Tax Administration (TIGTA) is required by law to annually determine whether the IRS complied with Code Section 6501(c)(4)(B), which requires that the IRS provide notice to taxpayers of their rights to decline to extend the assessment statute of limitations or to request that any extension be limited to a specific period of time or specific issues. TIGTA’s review of a statistical sample of 60 closed taxpayer audit files with assessment statute extensions found that the IRS was compliant with Code Section 6501(c)(4)(B). However, seven of the taxpayer audit files did not contain documentation to indicate whether taxpayers were properly notified of their rights as required by the IRS’s internal procedures. In addition, TIGTA’s review found six instances in which the audit files lacked documentation to support that the IRS complied with procedures requiring the notification of a taxpayer’s representative when an authorization for third-party representation exists. Specifically, TIGTA’s review of 44 taxpayer audit files that had authorizations for third-party representation found that six of the taxpayer audit files did not contain documentation to support that the taxpayers’ representatives were provided with the required notifications. To read the full report, go to www.treasury.gov/tigta/auditreports/2017reports/201730047fr.pdf.
The IRS has begun mailing letters to more than 1 million taxpayers with expiring Individual Taxpayer ?Identification Numbers (ITIN) and urges recipients to renew them as quickly as possible to avoid tax refund and processing delays. ITINs with middle digits 70, 71, 72 or 80 are set to expire at the end of 2017. The notice being mailed CP-48 Notices explains the steps taxpayers need to take to renew the ITIN if it will be included on a U.S. tax return filed in 2018. The notices will be issued over a five-week period beginning in early August. Taxpayers who receive the notice but have acted to renew their ITIN do not need to take further steps unless another family member is affected. Under the Protecting Americans from Tax Hikes (PATH) Act, ITINs that have not been used on a federal tax return at least once in the last three consecutive years will expire Dec. 31, 2017, and as mentioned above, ITINs with middle digits 70, 71, 72 or 80 will also expire at the end of the year. Affected taxpayers who expect to file a tax return in 2018 must submit a renewal application. ITINs with middle digits 78 and 79 that expired at the end of last year can be renewed at any time.
Tip of the DaySweat the small stuff . . . When you're under the gun, and desperately need help, which you won't get, there's a tendency to skip or put off the small stuff. Sometimes that can make sense, but think about what you're putting off first, it could cause you major headaches. One business owner wasn't checking his mail and didn't pay the insurance on his building. When he tried to reinstate the company looked at the building fresh and required him to abandon an in-ground oil tank and make upgrades to his fire suppression system, boiler and electrical. Let your worker's compensation insurance lapse? You could be in for some big penalties, depending on the state. Late with your employment tax deposits? One day late and you could get a 2% penalty. Doesn't sound like much until you annualize it. Sixteen days late and the penalty is 15%. Late renewing a service? You could be charged a higher price. Late canceling a service? You could be on the hook for another month. And late payments can affect your credit rating. The above applies to both your business and personal finances.
August 8, 2017
NewsThe Treasury has decided to phase out the myRA retirement savings program and the program is no longer accepting new enrollments. However, existing accounts remain open and accessible at this time. Funds in myRA accounts remain in an investment issued by the U.S. Department of the Treasury. A review by the Treasury found the program not to be cost effective. This review was undertaken as part of the Administration’s effort to assess existing programs and promote a more effective government. Demand for and investment in the myRA program has been extremely low. American taxpayers have paid nearly $70 million to manage the program since 2014. Participants in the myRA program are being notified of the upcoming changes, including information on moving their myRA savings to another Roth IRA. Participants are encouraged to visit www.myRA.gov for additional information or to call myRA customer support with any questions.
Notice 2017-42 (IRB 2017-34) announces that Treasury and the IRS intend to amend the Section 871(m) regulations (which treats dividend equivalent payments as U.S. source dividend income) to delay the effective/applicability date of certain rules in those final regulations and extends the phase-in period provided in Notice 2016-76 for certain provisions of the Section 871(m) regulations.
Tip of the DaySave more for retirement . . . Some professionals are warning that the historical stock market returns may decline in the coming years. There are several factors that could presage the lower returns. Unfortunately, there aren't many other options that readily replace stocks. One step you can take to prepare for retirement is to save more. And, fortunately, that option carries no risk.
August 7, 2017
NewsVictims of the Severe Storms and Flooding that took place beginning on June 22, 2017 in parts of Michigan may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of Michigan. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Michigan will receive tax relief. Individuals who reside or have a business in Bay, Gladwin, Isabella, and Midland Counties, and the Saginaw Chippewa Tribe within Isabella County 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 June 22, 2017, and before Oct. 31, 2017, are granted additional time to file through Oct. 31, 2017. This includes taxpayers who had a valid extension to file their 2016 return that was due to run out on Oct. 16, 2017. It also includes the estimated tax payment due on Sept. 15, 2017 and the quarterly payroll tax returns due on July 31, 2017. Affected taxpayers will not be subject to penalties for failure to pay estimated tax as long as these payments are made on or before Oct. 31, 2017. In addition, penalties on employment and excise tax deposits due on or after June 22, 2017, and before July 7, 2017, will be abated as long as these deposits were made by July 7, 2017. If an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date that falls within the postponement period, the taxpayer should call the telephone number on the notice to have the IRS abate the penalty.
The IRS has announced it is in the final stages of a technology upgrade for e-Services that will greatly improve the look and feel of various applications. This platform transition is part of a multi-year upgrade in technology support for e-Services. It is one in a series of steps being taken this year to improve e-Services usability and security. As part of the upgrade the Service has announced:
1. There will be a complete outage of all e-Services tools, including Registration, Transcript Delivery System (TDS), and TIN Matching, from 6 p.m. EDT, Thursday, August 17, until 6 a.m. EDT, Monday, August 21. Applications also will be offline and resume August 22, except for state users. E-Services must be taken offline to complete the platform transition and to perform testing. This outage will affect all users, including bulk users such as IVES and TIN Matching.
2. All State tax agency users will be unable to submit new e-file and TDS applications for state coordinators or change existing e-file and TDS applications for state coordinators from August 17 until late October. This temporary issue will not affect state access to transcripts. If there is a critical need to add or remove an individual from a state application, states may contact their IRS government liaison representative who will notify appropriate IRS personnel.
3. Affordable Care Act Information Return (AIR) filers may resume submission of applications for Transmitter Control Codes starting on August 22. The application process for AIR users has been offline since July because of the e-Services platform transition.
4. A redesigned e-Services landing page will launch August 21.
Tip of the DayBefore you sign . . . Read your lease carefully. Make sure you've got an out should things not work out. One business thought there was plenty of parking for his business. When he signed he had over nine months to build out the space before he had to make his first payment. It turned out the tenant moving into the adjoining space used up much of the available spots forcing the business owner to apply for a variance from the town. Best estimate on getting the variance? Six months. Once construction starts it'll take another six months plus to complete the work and get a certificate of occupancy. The business owner is seriously considering canceling the lease and looking for other space. For many businesses, particularly startups, such a situation could be a disaster. Make sure you have an out in your lease and, of course do your homework on the location and town rules.
August 4, 2017
NewsIn Steven J. Feldman (T.C. Memo. 2017-148) a taxpayer with outstanding liabilities claimed an abuse of discrection by a Settlement Officer (SO) in sustaining a Notice of Federal Tax Lien (NFTL). The taxpayer claimed insolvency which would allow him to have his account placed in currently not collectible (CNC) status. However, based upon the taxpayer's income and living expenses the SO determined he could make installment payments and was not insolvent. The Court found the IRS's filing of an NFTL was not premature and it was filed in accordance with administrative procedures. Although the NFTL was filed on March 17, 2015, while petitioner's OIC was being reconsidered, respondent is not precluded from filing an NFTL while an OIC is being considered. Petitioner was not a party to an installment agreement with respondent when the NFTL was filed; and petitioner did not present any evidence that withdrawal of the NFTL would facilitate collection or be in the best interests of petitioner and the United States. The Court found no abuse of discretion.
In Eaton Corporation and Subsidiaries (T.C. Memo. 2017-147) the taxpayer and the IRS entered into two advance pricing agreements (APAs) establishing a transfer pricing methodology for covered transactions between the corporation and its subsidiaries. The first APA (APA I) applied for the taxpayer's 2001-05 tax years, and the second APA (APA II) applied for the taxpayer's 2006-10 tax years. The taxpayer and the IRS agreed that the legal effect and administration of APA I and APA II were governed by Rev. Proc. 96-53, and Rev. Proc. 2004-40, respectively. In 2011 the IRS determined that the taxpayer had not complied with the applicable terms of the revenue procedures and canceled APA I, effective January 1, 2005, and APA II, effective January 1, 2006. As a result of canceling the APAs, the IRS determined that under Sec. 482 an adjustment was necessary to reflect an arm's-length result for the taxpayer's intercompany transactions. The taxpayer contends that the IRS's cancellation of APA I and APA II was an abuse of discretion because there was no basis for the cancellation under the applicable revenue procedures. The IRS contends that the determination to cancel both APA I and APA II was not an abuse of discretion because the taxpayer did not comply in good faith with the terms and conditions of either APA I or APA II and failed to satisfy the APA annual reporting requirements. As an alternative position, the IRS determined that the taxpayer transferred intangible property compensable under Sec. 367(d) to the taxpayer's controlled foreign affiliates for tax year 2006. In a second issue the taxpayer entered into a stock purchase agreement to purchase all of the outstanding stock of THI. THI planned to enter into bonus agreements with certain executives that provided for stock option grants. THI entered into agreements with certain executives to provide them with cash bonuses in exchange for their release of claims related to any stock options. For tax year 2005 the taxpayer claimed a deduction for the bonus amount payments. The IRS determined that the taxpayer was not entitled to the deduction and that the bonus payments should have been capitalized under Sec. 263. The taxpayer contends that it is entitled to a deduction under Sec. 162(a) because the bonus payments represented additional employee compensation. The Court held the IRS's determination to cancel APA I and APA II was an abuse of discretion, the taxpayer did not transfer intangibles subject to Sec. 367(d) and that the bonus payments represented employee compensation, entitling the taxpayer to a deduction under Sec. 162(a).
Tip of the DayRules are rules . . . Sometimes it seems like it shouldn't make a difference, but you've got to follow the rules. One taxpayer, who was covered by a SIMPLE IRA where he worked simply deposited the maximum contribution into the SIMPLE with money taken from his savings account instead of having his employer reduce his salary to fund the deposits. In addition, he took a deduction for the contribution. In court the taxpayer argued the IRS was no worse off. The Court was not unsympathetic to the taxpayer's position, but said the law was clear and disallowed the deduction.
August 3, 2017
NewsRecordkeeping is rarely fun, but it's an essential part of business, if you want to secure a deduction for your expenses. In Alan Brookes et ux. (T.C. Memo. 2017-146) the Tax Court agreed with the IRS the taxpayers' documentation was inadequate for many of the taxpayers' expenditures. The Court noted the lack of contemporaneous logs for travel and meals, and the lack of a business purpose. The Court also declined to apply the Cohan method to estimate some of the expenses, noting the taxpayer must establish that he is entitled to some deduction which it felt the taxpayer failed to do.
Just because the IRS sent you a refund doesn't mean the IRS can't issue a deficiency notice at a later date. That was what the Court noted in Maria Shenorah McCree (T.C. Memo. 2017-145). The Court noted that Sec. 7605(b) provides that no taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the IRS, after investigation, notifies the taxpayer in writing that an additional inspection is necessary. The taxpayer received a Letter 4464C which did not request that the taxpayer produce her “books of account” or other records. Indeed, Letter 4464C stated that the taxplayer was “not required to do anything at this time”, and she was issued her claimed refund without a request for documents or information. In his declaration, the IVO's senior technical advisor stated that Letter 4464C was issued to the taxpayer because her tax return was identified for possible inflated withholdings. The IVO then determined that petitioner had reported her withholdings correctly, but it did not evaluate or determine whether she had reported her income correctly. Research of records in IRS possession to verify withholdings does not constitute an examination in violation of Section 7605(b). Therefore, with respect to the taxpayer, Letter 4464C was not an indication of an audit or an examination, but one of the “narrow, limited contacts or communications between the Service and a taxpayer that do not involve the Service inspecting the taxpayer's books of account”.
Tip of the DayCasualty loss and potential recovery . . . The law allows a deduction for casualty losses sustained during the year that are not compensated for by insurance or otherwise. If you have a reasonable prospect of compensation for a loss should reduce the amount of the loss by the expected compensation. Whether you have a reasonable prospect of receiving compensation for the loss depends on the facts and circumstances of each taxpayer's case. Court cases indicate that a taxpayer has a reasonable prospect of recovery when the taxpayer has a bona fide claim and when there is a substantial possibility the claim will be decided in the taxpayer's favor. If you expect reimbursement for the loss, you must subtract the amount of the expected reimbursement from the loss. If the reimbursement is less than expected, you may include the difference as a loss in the year in which no more reimbursement is expected. If the reimbursement is more than the taxpayer expected, you may have to include the excess in income for the year of receipt if the original deduction reduced the tax for the year in which it was taken.
August 2, 2017
NewsIn Crestek, Inc. & Subsidiaries (149 T.C. No. 5) the taxpayer was the parent of a group of companies that includes a number of controlled foreign corporations (CFCs). Before FY 2008 one of the taxpayer's domestic subsidiaries (S1) borrowed money from the CFCs, and those loans remained outstanding throughout FY 2008 and 2009. S1 before FY 2008 also borrowed money from a Malaysian bank. CFC-1, a Malaysian subsidiary, guaranteed this loan. Before mid-2005 CFC-1 sold completed products to another domestic subsidiary (S2), for which S2 incurred payment obligations in the form of trade receivables. CFC-1 ceased manufacturing operations in mid-2005. The net trade receivable balance owed by S2 to CFC-1 remained constant at $7.92 million from mid-2005 through the end of FY 2009. After mid-2005 CFC-2 assumed the manufacturing activities of CFC-1 and sold completed products to S2. The net trade receivable balance owed by S2 to CFC-2 rose from $8.87 million in the first quarter of FY 2007 to $18.41 million in the last quarter of FY 2009. The IRS determined that all of these transactions gave rise to investments in “United States property” under Sec. 956(c)(1)(C) and accordingly determined that the taxpayer was required to include various amounts in gross income under Sec. 951(a)(1)(B). The Tax Court held that the outstanding intercompany loan balance owed by S1 to the CFCs constituted “United States property” held by the CFCs, within the meaning of Sec. 956(c)(1)(C), during FY 2008 and 2009 and that CFC-1's guaranty of S1's loan and direct or indirect pledge of assets as security for that loan constituted “United States property” held by CFC-1, within the meaning of Sec. 956(c)(1)(C) and (d), during FY 2008 and 2009. The Court also held the $7.92 million trade receivable balance owed by S2 to CFC-1, which had been outstanding for at least three years and bore no interest, was in excess of the amount that “would be ordinary and necessary” in a transaction between unrelated parties, within the meaning of Sec. 956(c)(2)(C), to carry on their respective trades or businesses. That trade receivable thus constituted “United States property” held by CFC-1, within the meaning of Sec. 956(c)(1)(C), during FY 2008 and 2009. Finally, the Court held that in consequence of the holdings above, the taxpayer must include various amounts in gross income under Sec. 951(a)(1)(B) and that there remained a material dispute of fact as to whether the trade receivable balances owed by S2 to CFC-2, which were incurred in an ongoing trade or business between those entities, were “ordinary and necessary” within the meaning of Sec. 956(c)(2)(C), to carry on their respective trades or businesses.
Tip of the DayCheck your contract . . . Generally, a contract written by a corporation or most other entities will survive an ownership change. For example, Darren is a contractor doing business as Madison Electric, Inc. He sells all the stock to Fred Flood. Madison has to honor any contracts for work to be performed and for purchases in the works. If he sold the assets of the corporation rather than the stock, the result would be different. But you may want to modify the wording. For example, you contract with Madison to wire your building. You're relying on Darren's expertise and your knowledge of his work and, should he sell out, you want a different contractor to perform the work. Make sure there's a clause in the agreement allowing you to void the contract.
August 1, 2017
NewsNotice 2017-36 (IRB 2017-33) announces that the Department of the Treasury and the Internal Revenue Service intend to amend Treas. Reg. Sec. 1.385-2 (the "Documentation Regulations") to apply only to interests issued or deemed issued on or after January 1, 2019. This amendment has the effect of delaying the application of the Documentation Regulations by 12 months. The notice also requests comments concerning whether the proposed amendment and delay of the application of the Documentation Regulations affords adequate time for taxpayers to develop any necessary systems or processes to comply with the Documentation Regulations.
The Combined Annual Wage Reporting (CAWR) Program compares the employee wage and withholding information reported to the IRS on employment tax forms to withholding documents filed with the Social Security Administration. The purpose of the IRS-CAWR Program is to ensure that employers report the proper amount of employment taxes and Federal income tax withholding on their employment tax returns. The Treasury Inspector General for Tax Administration (TIGTA) did an audit and found billions of dollars of potential employer underreported taxes are not being addressed because most discrepancy cases are not worked. TIGTA’s analysis of 137,272 Tax Year (TY) 2013 discrepancy cases found that the IRS worked only 23,184 (17 percent). The remaining 114,088 (83 percent) discrepancy cases that were not worked had a potential underreported tax difference of more than $7 billion. In addition, discrepancy case selection processes do not ensure that priority is given to working discrepancy cases with the highest potential tax assessment. TIGTA analyzed the 114,088 discrepancy cases that were not worked to identify those 23,184 with the highest potential underreported tax amounts by case type. It turned out that these had total potential underreported tax of more than $6.8 billion. In addition to changing its selection methodology to work case types with the highest potential tax assessment, the IRS could further increase its return on investment by including prior year discrepancy cases when working current year discrepancy cases for the same employer. TIGTA’s analysis found that 3,137 of the discrepancy cases identified in TY 2013 also had discrepancy cases in TY 2012, with potential underreported tax totaling more than $448 million for TY 2012. For the complete report go to www.treasury.gov/tigta/auditreports/2017reports/201740038fr.pdf.
Tip of the DayFalse sense of security . . . You've done business with Madison Inc. for 15 years and they've never even been a slow pay. But that doesn't guarantee they can't encounter financial problems. A change in the speed of payments, returned merchandise, arguments over invoices, can indicate potential trouble. Earlier warning signs can be a change in the market or the economy in general, or a change in ownership. It's not unusual for the sale of a company to be financed at least in part by debt. The interest and principal payments can overly stress the new owners and they're likely to put the squeeze on suppliers. Potential inexperience of new owners can add to that. Even large customers can succumb. Check those financials carefully.
July 31, 2017
NewsIn Dean Matthew Vigon (149 T.C. No. 4) the taxpayer submitted to the IRS nine Forms 1041, “U.S. Income Tax Return for Estates and Trusts”; and the IRS assessed against him nine $5,000 penalties under Sec. 6702 (for “frivolous tax submissions”), which are not subject to deficiency procedures and for which the IRS asserts there is no statute of limitations. The IRS issued to the taxpayer a notice of Federal tax lien under Sec. 6320(a), and the taxpayer requested a CDP (collection due process) hearing, during which under Sec. 6330(c)(2)(B) he challenged his underlying liability for the penalties. The IRS's Office of Appeals issued a determination sustaining the penalty liabilities and the notice of lien, and the taxpayer filed a Tax Court petition pursuant to Sec. 6330(d)(1). Thereafter the IRS abated the penalties, released the lien, and filed a motion to dismiss the petition on grounds of mootness; but IRS did not concede the taxpayer's liability for the penalties on the nine Forms 1041, and the Service reserved the right to reassess later Sec. 6702 penalties for the nine Forms 1041. The Tax Court held that despite the IRS's abatement of the penalties and release of the lien, the CDP case is not moot, in light of the taxpayer's liability challenge under Sec. 6330(c)(2)(B) and the IRS's non-concession as to liability and it's reserving the right to reassess the penalties.
Tip of the DayBorrow money on your stocks? . . . It can be a risky maneuver if you're not careful. Borrowing on existing holdings is different than a margin account. On the other hand, if your business needs cash for new equipment, you need a bridge loan on a new home, etc. borrowing on your stocks can make sense if you're sitting on a big gain and cashing in would result in a substantial tax bite. But keep in mind that if you can't make the payments on the loan or your portfolio declines below a certain point, those stocks could be sold to cover the loan. And you could find yourself in a bad tax position where you have no options. In a worst case scenario where you're highly leveraged and a big drop in your collateral you could owe more in taxes than you net proceeds on the sale of the stock. And, the deductibility of the interest on the loan would depend on the use of the funds. Discuss the option with your financial advisor before proceeding.
July 28, 2017
NewsUnemployment insurance payments are taxable to the recipient. If you receive an excess payment and pay back the excess, you simply report the net of the two amounts. In Michael S. Yoklic and Kay E. Ross (T.C. Memo. 2017-143) the taxpayer paid back an excess unemployment benefit in the subsequent year. The Tax Court held that excess amount was income in the first year and the repayment a deduction in the second. Even though the obligation to repay was fixed in the first year, under the doctrine of recission the taxpayer's payment in the second year means it was deductible in that year.
Having your IRA invest in your business sounds like a great idea. Unfortunately, there are a number of restrictions on such a move. In Block Developers, LLC, William J. Maxam, APC, Tax Matters Partner, et al. (T.C. Memo. 2017-141) through a complicated structure, the taxpayer's Roth invested in their business. The IRS asserted this was similar to a transaction described in Notice 2004-8 as an abusive tax-avoidance transaction with excess contributions to an IRA as a key element. The taxpayers argued that the notice did not apply to them because the transactions had a business purpose. The Tax Court found that the business purpose was an illusion, citing the substance-over-form doctrine. The Court held the contributions to the IRAs were excessive and allowed the excess contributions penalty.
Tip of the DayPlan ahead . . . Sounds like obvious advice? Then why are so many business owners and managers not doing it? Every day we see people sending documents or checks by overnight express when they knew about the deadline weeks earlier. Or ordering product at the last minute and paying an expedite fee or upcharge. Asking for a rush job is almost always more expensive, often by a significant factor. And even if there's no cost, you know your vendor isn't happy and may not respond as well in the future. The same is true for employees. Many will put in the extra time when there's a true emergency, but will soon tire of having to always put in overtime to extinguish fires. Not planning ahead can be costly.
July 27, 2017
NewsThe IRS has released IR-2017-123, Don't Take the Bait, Step 3, which discusses more on identity theft with a focus on businesses. The IRS said that identity theft reported by individuals declined sharply in the first five months of 2017, with almost half as many cases reported for the same period in 2016, and about a third as many as in 2015. However, identity theft involving business-related returns is up sharply. For the first five months of 2017 the number is 10,000 compared with 4,000 for all of calendar year 2016 and only 350 for all of 2015. Tax return preparers will have to gather more information from business clients for the 2018 filing season.
If you have different lots of securities bought at different times and prices, which ones you sell will make a difference in your gain or loss. For example, if you bought 100 Madison shares at $10 and 100 at $20 and sell 100 at $15, you'll have a gain if you sell the ones bought for $10, or a loss if you sell the ones bought for $20. If there's a profit (or loss) on all the lots, picking the right lot can affect the amount of your gain (or loss). In Kenan Turan (T.C. Memo. 2017-141) the taxpayer was a part-time day trader. The default method used by the broker which reporting the basis of stocks sold by customers was FIFO, first-in-first-out. That meant the cost of the first securities sold would be the first bought. The taxpayer claimed he should be able to use a LIFO, last-in-last-out, method because he attempted to request a change to that method but was unable to do so because of a fault in the broker's website. The Tax Court found the taxpayer offered no evidence to support his claim of a computer error or any contact with the broker. The Court held he never instructed the broker to change the method of identifying lots.
Tip of the DayWork with your vendors . . . While keeping close contact with your customers can be vital to a business, maintaining close ties to your suppliers and subcontractors can be just as important. They may provide you with new trends in the industry, an early warning on products that may be discontinued or changed, product information, etc. Often when you just put in an order you simply get what you ask for. But if you talk to the vendor he may have suggestions on how to reduce costs or increase quality, etc.
July 26, 2017
NewsThe IRS has issued final regulations (T.D. 9822) relating to the health insurance premium tax credit. These regulations affect individuals who enroll in qualified health plans through Affordable Insurance Exchanges (Exchanges, also called Marketplaces) and claim the premium tax credit and Exchanges that make qualified health plans available to individuals. The regulations contain relief for joint filing requirement for married victims of domestic abuse and correct an error in the computation of the limitation amount for self-employed individuals.
Taxpayers who sustained losses in additional areas of Nebraska as a result of a severe winter storm and straight-line winds during the period of April 29 to May 3, 2017 may deduct their losses on their 2017 or 2016 returns. The additional counties include Blaine, Custer, Furnas, Garfield, Gosper, Holt, Loup, Red Willow, Rock and Valley.
Tip of the DayKeep 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.
July 25, 2017
NewsThe Internal Revenue Service Office of Appeals will soon pilot a new web-based virtual conference option for taxpayers and their representatives. This virtual face-to-face option will provide an additional option for taxpayer conferences. The IRS expects it to be especially useful for taxpayers located far from an IRS Appeals office. Appeals’ pilot program will use a secure, web-based screen-sharing platform to connect with taxpayers face-to-face from anywhere they have internet access. Similar to popular screen-sharing programs used on phones and home computers, this technology may also be a way for the IRS to provide greater access, efficiency and flexibility to taxpayers. This web-based model is more convenient and has more features than the existing video-conferencing technology. Taxpayers will still be able to have a phone or in-person conference. For more information, see IRS news release IR-2017-122.
If you use EFTPS or IRS Direct Pay to make tax payments you can now request email notification of payments. The email will contain the amount and the confirmation number of the transactions. You make the request when enrolling or updating your account for EFTPS and with each payment for Direct Pay. Businesses can also receive notification of EFTPS payments made by a payroll service.
Tip of the DayBuying a vacation property? . . . If you expect rent the property when you're not using it and turn a profit, think again. Some owners do turn a tidy profit on a vacation rental but there's usually something special about the property--the Hamptons on Long Island, Cape Cod, lake and ocean front properties in many areas all command top dollar. But move down a notch even in the same area and rental prices can drop significantly. You've also got to provide special services with short-term rentals. The space has to be cleaned after every tenant and wear and tear can be higher. If you use the property for personal purposes you'll have to allocate your expenses on the property. If you need income from the property to help with the mortgage, taxes and other expenses, get good advice. In addition, talk to your CPA or financial advisor.
July 24, 2017
NewsThe IRS has issued Fact Sheet FS-2017-9 reminding small businesses of the importance of understanding and correctly applying the rules for classifying a worker as an employee or an independent contractor. For federal employment tax purposes, a business must examine the relationship between it and the worker. The IRS Small Business and Self-Employed Tax Center on the IRS website offers helpful resources. Worker classification is important because it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee.
An Electronic Filing Identification Number (EFIN) allows a tax preparer to send returns to the IRS electronically. The IRS issues the number only after doing a background check. The EFIN number is valuable to the preparer or the organization to which it's issued. But the IRS has the power to revoke an EFIN for good cause. In Snyder & Associates Acquisitions LLC, et al. (U.S. Court of Federal Claims) the IRS did revoke the company's EFIN. The company sued, claiming the Governement took their businesses and goodwill without just compensation. The company was looking for some $2.6 million. The Court noted when a party receives a permit to engage in an activity “which, from the start, is subject to pervasive Government control,” no cognizable property interest capable of supporting a takings claim ever arises in that permit. The Court also noted no contract existedbetween the company and the Government. The Court denied the company's claim.
Tip of the DayRetailer with pinched margins? . . . If you do business through stores and sales and/or margins are under pressure a discussion with your landlord could help. Depending on your location--free standing building, strip center, large mall--you may be able to negotiate a better deal either through a reduction in base or percentage rent or by giving up some space or moving into a smaller space in the center. If you're paying percentage rent it might be easier to negotiate a change in the percentages or breakpoint. A simple cut in the base rent may have a number of negative implications for the landlord. Consider getting professional help in the negotiations.
July 21, 2017
NewsNotice 2017-40 (IRB 2017-32) amplifies Notice 2015-77 with respect to the Treasury Department’s Housing Finance Agency Innovation Fund for the Hardest-Hit Housing Markets (HFA Hardest Hit Fund) by extending through 2021 the safe harbor method for computing a homeowner’s deductions for payments made on a home mortgage and the relief for mortgage servicers and state housing finance agencies (State HFAs) from penalties relating to information reporting. In addition, this notice amplifies Rev. Proc. 2011-55 by extending its scope and effective date through calendar year 2021 for the HFA Hardest Hit Fund.
You don't need to receive cash from your qualified plan in order to be taxed on a distribution. Having a loan outstanding and failing to comply with the repayment terms can trigger a "deemed distribution" which has the same effect. That was the situation in Louelia Salomon Frias et vir (T.C. Memo. 2017-139). The taxpayer took a loan from her 401(k) of $40,000. The loan agreement specified that repayments were to be made through biweekly paydroll deductions. Unfortunately, her employer failed to deduct the amounts from her paycheck. When she realized the error she promptly tried to cure the problem, but unknown to her by then it was too late. Nonetheless, she made regular payments on the loan. The plan administrator posted a Form 1099-R on its website, but the taxpayer never accessed it. The taxpayer claimed she qualified for the exception of someone on leave. Unfortunately, she received accrued vacation, and sick pay for the first five weeks of the loan. The Court held the exception did not apply and the taxpayer was liable for the 10% penalty on early distributions. The IRS also assessed the 20% accuracy-related penalty. The Tax Court noted that nonreceipt of an information return such as a Form 1099-R does not excuse a taxpayer from his duty to report the income, and nonreceipt is not enough to constitute reasonable cause. However, the Court also noted that in contrast to other to other cases where the taxpayers knew or should have known they had taxable income, the record supports a finding that the taxpayer did not have reason to know that her loan had been treated as a deemed distribution for 2012. (The plan administrator recorded the loan as paid at the end of the term and sent her correspondence to that effect.) Her employer had an obligation to withhold the loan repayment amounts from her paychecks and to transmit the amounts to the administrator. The employer failed to meet this obligation and provided advice which proved to be wrong. The Court found the taxpayer not liable for the accuracy-related penalty.
Tip of the DayWithholding on real property sales by foreign persons . . . The Foreign Investment in Real Property Tax Act (FIRPTA) requires a FIRPTA withholding tax of 10% of the amount realized on the disposition of all U.S. real property interests by a foreign person. A buyer of U.S. real property interest from a foreign investor is considered the (transferee) and also the withholding agent. The transferee must find out if the transferor is a foreign person. If the transferor is a foreign person and the transferee fails to withhold, the buyer may be held liable for the tax. The seller must report that sale of the real property interests by filing a U.S. Federal Tax Form 1040-NR or Form 1120-F. For more information, go to FIRPTA Withholding Withholding of Tax on Dispositions of United States Real Property Interests at irs.gov.
July 20, 2017
NewsThe IRS has issued a final regulation (T.D. 9820) changing the amount of the user fee for the special enrollment examination to become an enrolled agent. The new fee is set at $81 per examination part. The final regulation affects individuals taking the enrolled agent special enrollment examination.
The IRS has issued final and temporary regulations (T.D. 9821) that update the due dates and extensions of time to file certain tax returns and information returns. The dates are updated to reflect the new statutory requirements set by section 2006 of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 and section 201 of the Protecting Americans from Tax Hikes Act of 2015. These regulations affect taxpayers who file Form W-2 (series, except Form W-2G), Form W-3, Form 990 (series), Form 1099-MISC, Form 1041, Form 1041-A, Form 1065, Form 1120 (series), Form 4720, Form 5227, Form 6069, Form 8804, or Form 8870.
If you're contributing more than $500 of property (clothing, appliances, etc.) you've got to file Form 8283 and your chances of an inquiry from the IRS most likely increase. That means you want to double check your documentation. In Mark Robert Ohde et ux. (T.C. Memo. 2017-137) the taxpayer claimed charitable contributions of property of some $145,000 for the year at issue. (The taxpayer also contributed large amounts in several prior years.) The Court noted the similar items of property must be aggregated for purposes of determining whether a contribution exceeds the $5,000 threshold (which was clearly exceeded) where a "qualified appraisal" is required and the no appraisal of any kind was obtained. The Court found the taxpayers' claim that they donated more than 20,000 items to Goodwill in a single year is implausible on its face and was unsupported by any credible testimony or other reliable evidence. They kept no contemporaneous records establishing the number of items actually donated or the values of such items. The Court denied a deduction for all but $250.
Tip of the DayRetiring business owners . . . Current or former business owners who are retiring and other retirees often have unique retirement issues and advantages. They may or may not have a pension. They may have a large lump-sum payment to invest from the sale of their business, or a payment spread out over a number of years. They may hold an interest in rental real estate, often retaining the business' building and leasing it back to the new owner. Sometimes they have interests in other local businesses that may or may not throw off cash distributions. The businesses may be profitable and create a tax liability without the cash to pay the taxes. And, in more than a few cases they may still be working well into "retirement" and have to take distributions from an IRA or pension plan as well as collecting social security while taking a salary and having pass-through profits from the business. If you fall into these categories or other special situations you need more than a cookie-cutter approach to retirement and estate planning. Get good advice and if your CPA isn't your financial advisor, make sure he knows about your plans.
July 19, 2017
NewsAs a result of severe storms, straight-line winds and flooding in Tennessee from May 27 to May 28, 2017, the president has delcared the counties of Blount, Cumberland, Fayette, Knox, Loudon, Morgan, Putnam, Rhea, roane, Sevier, Shelby and Smith eligible for federal government assistance. Taxpayers in these counties who susained losses as a result of the disaster may deduct the losses on either their 2017 or 2016 income tax returns.
Distributions for qualified retirement plans, including IRAs, you receive before reaching age 59-1/2 are subject to a 10% penalty tax unless you meet one of the exceptions. In David D. Pritchard and Barbara H. Pritchard (T.C. Memo. 2017-136) the taxpayers took an early distribution of some $69,600 from an IRA. Neither taxpayer had achieved age 59-1/2. A portion of the distribution was used to pay state and federal income taxes. The Tax Court heard the taxpayers' arguments, but noted that none of the statutory exceptions to the penalty applied, which even the taxpayers conceded. The Court allowed the imposition of the penalty.
Tip of the DayProfit vs. cash flow . . . The danger of measuring your success by your cash flow is that ultimately profits are paramount. Cash flow doesn't take into account depreciation and other noncash charges. The machine or other property that's generating that cash flow will have to be replaced at some time in the future. At that point, cash flow will be negative. On the other hand, a venture that's not profitable may be generating cash that can be used to finance other activities. And an operation that's profitable could be a big cash drain because it requires constant cash infusions. Before considering acquire or dispose of a business, analyze both the profit and the cash flow from it and how it relates to your business.
July 18, 2017
NewsYou may be able to cover your attorney's fees and other administrative and litigation costs if you are the "prevailing party" in a dispute with the IRS. In Nina H. Kazazian (T.C. Memo. 2017-135) the IRS Appeals officer determined the taxpayer was not entitled to innocent spouse relief. Before the issue went to court the IRS conceded and granted innocent spouse relief. The taxpayer sought her litigation and administrative costs. A taxpayer is not the prevailing party if the IRS's position is "substantially justified". A position is substantially justified if it is justified to a degree that could satisfy a reasonable person and has a reasonable basis both in law and in fact. The IRS's position may be substantially justified even if incorrect if a reasonable person could think it correct. The fact that the IRS loses a case or makes a concession “does not by itself establish that the position taken is unreasonable” but is “a factor that may be considered.” The Court denied the petitioner her litigation costs. The Court also noted that even if she was the prevailing party she had not proven the dollar amount of professional fees that she incurred in pursuing her claim for innocent spouse relief.
Tip of the DayLike-kind exchanges . . . Often known by the applicable Code Section, 1031 exchanges, are a way of deferring tax on the gain of a property your disposing of by replacing it with a similar property. A trade-in of a truck or other equipment used in your business for a new one is the most common example, but real estate investors often use the approach to great benefit. Unfortunately, this is one tax benefit Congress may do away with in comprehensive tax reform. We're not sure how serious the they are, but there's no doubt that it would be an important revenue raiser. What are the chances of passage? Not sure. But if you've got one or more investment or rental properties you're considering selling, you might want to track the legislation and be ready to do an exchange.
July 17, 2017
NewsIn Bob Gregory et ux. (149 T.C. No. 2) the taxpayers owned C, an S corporation that operated a landfill and used the cash method of accounting for tax purposes. C was legally required to pay reclamation and closing costs if and when it closed the landfill. C currently deducted its estimated clean-up costs under Section 468. The IRS contended that Section 468 applies only to accrual-method taxpayers. The Tax Court held the term “taxpayer” in Section 468 includes cash-method taxpayers and is not limited to accrual-method taxpayers. The Court also held cash-method taxpayers must make a Section 468 election to currently deduct estimated reclamation, closure, and post-closure costs before the costs are paid. C did make such an election, and it may therefore currently deduct its estimated reclamation and closing costs.
Tip of the DayLiens . . . Buyng property from a party in financial difficulty sounds like it could be a good deal. A caah-strapped seller may let the property go for less than fair market value. But there could be liens attached to the property. If the debt is owed to the federal government, the government must receive adequate notice of the sale, otherwise the linet is not discharged. If significant amounts are involved, such as in the case of large equipment or real estate, consult your attorney before acting.
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