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March 12, 2010
News
The Senate has passed The American Workers, State and Business Relief Act which retroactively extends tax cuts for middle-class families and businesses that expired at the end of 2009. The provisions in this bill include:
The House has passed a provision that would allow taxpayers to deduct on their 2009 tax return cash contributions to the Chile relief effort made through April 15, 2010. The deadline for contributions (that would be deducted on a 2009 return) benefiting Haiti that expired on March 1 would be extended to April 15.
Tip of the Day
Spouse died during the year? . . . If your spouse died during the year, you are considered married for the whole year and can choose married filing jointly as your filing status. If your spouse died before signing the return, the executor or administrator must sign the return for your spouse. If neither you nor anyone else has yet been appointed as executor or administrator, you can sign the return for your spouse and enter "Filing as Surviving Spouse" in the are where you sign the return.
March 11, 2010
News
The IRS has decided acquiesce (Action on Decision Memorandum) in result only in the case of James R. Thompson a case in which the Court of Federal Claims concluded that LLC interest are not "limited partnership interests" for purposes of Sec. 1.469-5T(e)(3)(i). In Thompson the taxpayer owned 99% of an LLC that was in the airplane charter business. The taxpayer indirectly owned the remaining 1% interest through a wholly-owned S corporation. In that case the Court held the taxpayer could establish material participation using any of the seven tests in Sec. 1.469-5T(a).
Rep. Sander Levin who has taken over the acting chairmanship of the House Ways and Means Committee has announced he wants to introduce a bill that would eliminate capital gains taxes for some small-business stock. The provision would be inserted in the "extenders" legislation.
The "extenders" legislation has taken a stop closer to passage when the Senate voted to end debate on the bill.
Tip of the Day
Qualified nonpersonal use vehicle . . . Some vehicles are exempted from the depreciation (and lease) limitations on autos and trucks. They include vehicles under a certain weight and qualified nonpersonal use vehicles. These are vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes. They include trucks and vans that have been specially modified so that they are not likely to be used more than a minimal amount for personal purposes, such as by the installation of permanent shelving and painting the vehicle to display advertising or the company's name. Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat are qualified nonpersonal use vehicles.
March 10, 2010
News
Notice 2010-26 (IRB 2010-14) designates the Chile earthquake occurring in February 2010 as a qualified disaster for purposes of Sec. 139 in the affected areas of Chile. The designation enables employer-sponsored private foundations to assist certain victims in areas affected by the Chile earthquake and enables recipients to exclude qualified disaster relief payments from gross income.
The IRS has released updates of the following publications:
Tip of the Day
State income tax deductions and credits . . . If you make estimated tax payments to one or more states, deducting and taking credit for those taxes can get tricky. Here are some tips:
March 9, 2010
News
The IRS is providing guidance on how Austin area taxpayers can reach the agency regarding urgent tax issues in the aftermath of the plane crash at the Echelon 1 Building, located at 9430 Research Boulevard in Austin. Taxpayers with questions or concerns related to open cases at the Echelon 1 building may call the following numbers for assistance:
Taxpayers may also call the local Austin Taxpayer Advocate at 512-499-5875. The Taxpayer Advocate Service is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should. Tax professionals with inquiries should direct any issues or concerns to the local Austin IRS stakeholder liaisons at either of the following numbers: 512-499-5529 or 512-499-5715.
Revenue Procedure 2010-19 (IRB 2010-13) provides guidance for individuals who emigrate from Canada and wish to make an election for U.S. federal income tax purposes under paragraph 7 of Article XIII (Gains) of the Convention between the United States of America and Canada with Respect to Taxes on Income and on Capital, signed on September 26, 1980, as amended by Protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997, and September 21, 2007 (the “Treaty”) with respect to property that is subject to Canadian departure tax under Canada’s deemed alienation rules (the terms “alienation” and “disposition” are used interchangeably throughout this revenue procedure).
Tip of the Day
Repayment of canceled debt . . . If debts you owe another party are canceled by the creditor, you generally have cancellation of debt income. If you included a canceled debt in your income and later repay the debt, you may be able to file claim for refund for the year the amount was included in income. File a claim on Form 1040X, if the statute of limitations for filing a claim is still open.
March 8, 2010
News
Revenue Procedure 2010-14 (IRB 2010-12) provides a safe harbor method of reporting gain or loss for certain taxpayers who initiate deferred like-kind exchanges under Sec. 1031 but fail to complete the exchange because a qualified intermediary (QI) defaults on its obligation to acquire and transfer replacement property to the taxpayer. If a taxpayer meets the requirements of the revenue procedure, the IRS will not treat the taxpayer as being in actual or constructive receipt of exchange proceeds if the taxpayer does not complete an exchange because of a default of a QI that becomes subject to a bankruptcy or receivership proceeding. A taxpayer reports gain under the revenue procedure on the disposition of relinquished property as the taxpayer receives payments.
The IRS has released the 2010 update to the Allowable Living Expense Standards on March 1. The ALE standards are used to reduce subjectivity in determining what a taxpayer may claim as basic living expenses necessary to avoid undue hardship when the taxpayer must delay full payment of a delinquent tax. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. For more details, go to Collection Financial Standards.
Tip of the Day
Renting former home? . . . It's not unusual these days. If you can't sell a home and you've got to move, renting it can defer the costs. You can deduct losses if you meet the requirements for rental activities and you intend to make a profit. You can only deduct the portion of expenses incurred for the part of the year the property was held out for rental. Thus, only a portion of the real estate taxes, interest, and other expenses should be deducted on Schedule E. (The other portion of taxes and interest can be deducted on Schedule A, subject to the normal rules.) Don't forget to take depreciation--but only on the lesser of the purchase price or the fair market value of the property (building only) at the time of conversion to rental.
March 5, 2010
News
The IRS has announced (IR-2010-027) that a Massachusetts tax attorney has been barred from practicing before the IRS for 48 months for failing to file one federal tax return and for filing another five returns late. The OPR (Office of Professional Responsibility) had originally sought the 48-month suspension, alleging the attorney's conduct was willful and disreputable. OPR enforces standards of conduct under Treasury Circular 230, which governs enrolled agents, attorneys and certified public accountants. The attorney formerly worked for the IRS Office of Chief Counsel. The Administrative Law Judge (ALJ) subsequently set the penalty at a 24-month suspension. The attorney appealed the decision to the Secretary of the Treasury’s Appellate Authority, which in fact ultimately imposed the harsher 48-month suspension.
In 2004 the taxpayer and her husband litigated three consolidated cases before the Tax Court concerning their 1996, 1997, and 1998 tax years. The taxpayer's attorney raised the issue of relief from joint and several liability under Sec. 6015, in the petition for 1996 but not 1997 or 1998. The request did not invoke any specific subsection of Sec. 6015. The taxpayer then withdrew her claim for relief from joint and several liability in the stipulation of facts for the consolidated cases. The taxpayer's husband died after the opinion in the consolidated cases was filed but before decisions were entered. After decisions were entered, the taxpayer filed an administrative claim for relief from joint and several liability with the IRS for 1996, 1997, and 1998. The IRS determined the taxpayer did not qualify for relief under Sec. 6015(b), (c), or (f), and that her claim was barred by Sec. 6015(g)(2), regardless. The Court held that Sec. 6015(g)(2), applies because the Court entered final decisions for 1996, 1997, and 1998. The Court also held the taxpayer did not participate meaningfully in the prior proceeding, that relief from joint and several liability was raised only in the pleadings for 1996. Therefore, for 1997 and 1998 Sec. 6015 relief from joint and several liability was not an issue in the prior proceeding. The Court also held that for purposes of Sec. 6015(g)(2), an election under Sec. 6015(c), shall not be deemed to have been an issue in a prior proceeding where the requesting spouse's original request for relief under Sec. 6015 did not specifically invoke Sec. 6015(c) and the requesting spouse was ineligible to make an election under Sec. 6015(c) at the time because the requesting spouse's husband was alive. Accordingly, an election under Sec. 6015(c) for 1996 was not an issue in the prior proceeding. Finally, the Court held that the exception in Sec. 6015(g)(2) applies to, and the taxpayer is not barred from electing, relief from joint and several liability under Sec. 6015(c), for 1996 and relief from joint and several liability under Sec. 6015(b), (c), and (f), for 1997 and 1998. Sari F. Diehl (134 T.C. No. 7)
In Karl L. Matthies et ux. (134 T.C. No. 6) a profit-sharing plan of the taxpayer's wholly owned S corporation bought a life insurance policy on the taxpayers' lives with funds rolled over from the husband's IRA. The profit-sharing plan later sold the policy to the taxpayer for $315,023, which slightly exceeded the policy's cash surrender value, net of a $1,062,461 surrender charge. For income tax purposes, the taxpayers valued the policy at its net cash surrender value and reported no gain on the transaction. The IRS determined that the policy should be valued without any reduction for surrender charges and that the bargain sale of the insurance policy gave rise to taxable income to the taxpayers. The Tax Court held that pursuant to Sec. 1.402(a)-1(a)(2), Income Tax Regs., as in effect before amendment in 2005, the value of the insurance policy is determined by reference to its "entire cash value", which allows no reduction for surrender charges. Held, further, the bargain element of the sale of the insurance policy represented taxable income to the taxpayers pursuant to Sec. 61. Held, further, because they had a reasonable basis for their return position, the taxpayers are not liable for the accuracy-related penalty for negligence under Sec. 6662(a).
Tip of the Day
Bad instructions aren't a tax loophole . . . In a recent state tax case the court held a taxpayer couldn't compute his taxes based on wrong instructions in the rate table. The court held there was no provision in the tax law that allows a taxpayer to compute his or her tax based on wrong information, even if it was provided by the state.
March 4, 2010
News
You can only take deductions on Schedule C (sole proprietorship) if you're not an employee of the company for which you're working. (There's a special exception for what's known as a statutory employee.) In Thomas Rosato et ux. (T.C. Memo. 2010-39) the Tax Court looked at the factors the determine the status of a worker (employee or independent contractor) and found the employee to be a common law employee of the company. The Court also found that the taxpayers liable for the accuracy-related penalty, having incorrectly reported his income and expenses on Schedule C.
If you have a net operating loss (NOL) for a year, you must first carry back the loss two years. If the loss is not fully utilized on that return, you can apply it to the year preceding the year of the loss. If still not used you can carry the loss forward. You can make an election to forgo the carryback and just carry the loss forward. In John Michael Davidson (T.C. Memo. 2010-38) the Court held the taxpayer failed to make that election. The Court held the taxpayer had to establish that those losses were not absorbed by his gross income in prior years. However, since he had sufficient income in those years, the losses were disallowed.
Tip of the Day
Schedule B question . . . At the bottom of Schedule B (interest and dividends) for Form 1040 are two questions relating to foreign accounts and trusts. If you have over $1,500 in taxable interest or ordinary dividends, or you have a foreign account or received a distribution from or were a grantor of or a transferor to a foreign trust, you've got to answer those questions. In the light of the increased scrutiny of foreign accounts by the IRS, be sure you answer the questions. If you're preparing the return yourself, make sure you check the boxes; don't assume your software will do so automatically. If you're using a paid preparer, double check him or her.
March 3, 2010
News
The IRS has announced (IR-2010-025) an administrative determination to accept the position that medical residents are excepted from FICA taxes based on the student exception for tax periods ending before April 1, 2005, when new IRS regulations went into effect. The IRS will, within 90 days, begin contacting hospitals, universities and medical residents who filed FICA (Social Security and Medicare tax) refund claims for these periods with more information and procedures. Employers and individuals with pending claims do not need to take any action at this time. For more information, call 1-800-919-1703 or visit www.irs.gov/charities and click on Medical Resident FICA Refund Claims.
If you want to avoid a lien on your assets for unpaid taxes, you want to make sure you're current in your installment payments on any outstanding debt and current on your estimated taxes and filing your returns. In Joe Rey et al. (T.C. Memo. 2010-35) the IRS found a lien to be appropriate where the taxpayers were not current on their long-term installment arrangement and provided no collection alternatives. The taxpayer testified that there was an abuse of discretion in that the collection officer who set up his payment plan and the two officers who conducted the hearings he requested did not properly weigh the facts and consider the financial hardship that the lien would bring about, that is, the lien was more intrusive than necessary. The Court noted he argued, but did not show, that the conclusion that they have the ability to pay the outstanding liabilities was erroneous, which is a less rigorous standard than arbitrary and capricious. The Court held that the taxpayer's failure to make voluntary payments for several years supported the need for a lien.
Avoiding the hobby-loss trap is difficult enough even with good books and records. In Georgia C. Farber (T.C. Memo. 2010-37) the taxpayer reported on her Schedule C $2,351 of gross receipts from her candle-selling activity and $33,475 in deductions for advertising, insurance, taxes, licenses, etc. The Court noted the taxpayer did not maintain a general ledger, financial statements, records of insurance, records of appraisal, records of advertising, or a separate bank account relating to her retail activity. Further, petitioner did not create income and expense worksheets, business or marketing plans, operating budgets, cost-benefit analyses, or financial projections relating to the activity, nor did she obtain a business license or fictitious business name relating to her retail activity. Expenses relating to petitioner's retail activity were billed to her and paid out of her personal accounts. The Court found she did not have the requisite intent to make a profit, and disallowed all deductions in excess of her gross income from the activity.
Tip of the Day
Unclaimed refunds . . . This is the time of the year when the IRS reports the number of unclaimed refunds on a tax year that's about to expire. For 2006, the statistics are some $1.3 billion in unclaimed refunds for some $1.4 million people who did not file for that year. And the deadline is fast approaching. You must file that 2006 return by April 15, 2010 in order to claim the refund. If you need help from a professional, don't wait till the last minute. You may not get a lot of sympathy from a harried preparer as the deadline nears and there's no extension.
March 2, 2010
News
The IRS has issued proposed (REG-117501-09) final and temporary regulations (T.D. 9480) under Section 6654 on reduced estimated income tax payments for qualified individuals with small-business income for any tax year beginning in 2009. Effective March 1, 2010, the temporary regs implement changes to Section 6654 made by the American Recovery and Reinvestment Act of 2009. The text of the temporary regs also serves as the text of simultaneously released proposed regulations. For required annual payment purposes, the American Recovery and Reinvestment Act added section 6654(d)(1)(D), which reduces the applicable percentage of tax shown on the return for the preceding tax year--either 100 percent or 110 percent--to 90 percent for qualified individuals. Thus, for tax years beginning in 2009, a qualified individual's annual required payment of estimated tax is the lesser of 90 percent of the tax shown on the return for the 2009 tax year or 90 percent of the tax shown on the individual's return for the 2008 tax year. The temporary regs provide guidance for qualified individuals with small-business income to certify that they satisfy the statutory gross income requirement for purposes of the reduction in their required 2009 estimated income tax payments.
Congress mandated that the IRS prohibit ex parte communications between Appeals officers and other IRS employees to the extent that such communications appear to compromise the independence of the Appeals officers. The IRS has issued guidance to fulfill that congressional mandate and ensure an independent Appeals Office. This guidance defines ex parte communications as communications between IRS Appeals and another IRS function without the participation of the taxpayer or the taxpayer's representative. Not all ex parte communications are prohibited, however. Ex parte communications are allowed when the communications involve matters that are ministerial, administrative, or procedural in nature and do not address the substance of the issues or positions taken in the case. In Lyle E. Hotchkiss (T.C. Memo. 2010-32) the taxpayer argued that the conversation between the Appeals Officer and a Special Agent (with the Criminal Investigation Division) was a prohibited ex parte communication. He further argued that all semblance of impartiality in the Appeals process disappeared when the Appeals Officer spoke to the Special Agent and became, in effect, a criminal investigator allied with the IRS Criminal Investigation Division. The Court noted the discussion between the two IRS employees occurred after the taxpayer's offer in compromise was rejected. The Court also noted the Appeals Officer was aware of the taxpayer's criminal convictions before speaking to the Special Agent. The Court held the communication did not constitute an impermissible ex parte communication because it was ministerial, administrative, or procedural in nature and did not compromise, nor give the appearance of compromising, the Appeals Officer's independence.
Tip of the Day
Sold stock last year? . . . Even if you or your child's income is below any filing requirements, if you sold stock or other securities, you'll probably have to file a return. Without a return the IRS will assume all the gross proceeds reported by your broker is income. For example, Fred had no earnings last year but sold $17,500 in stock on which he had big losses. If he doesn't file and report the gross proceeds and the basis in the stock, the IRS will assume the entire $17,500 is income. Avoid that notice--file a return.
March 1, 2010
News
The IRS has announced Rev. Rul. 2010-9 (IRB 2010-13) that interest rates on over- and underpayments for the calendar quarter beginning April 1, 2010, will remain the same. The rates will be:
Announcement 2010-16 (IRB 2010-11) temporarily suspends, for persons who are not United States citizens, United States residents or domestic entities the requirement to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), for the 2009 and earlier calendar years.
Notice 2010-23 (IRB 2010-11) provides FBAR (Report of Foreign Bank and Financial Accounts) filing relief for some persons with signature authority and who own commingled funds. The Notice also modifies and supplements Notice 2009-62.
In Lisa R. Cole et vir et al. (T.C. Memo. 2010-31) two brothers operated a law practice; the wife of one of the brothers acted as a paralegal. They opened a business checking account for Cole Law Offices but used the a former entity's employer identification number. The brothers agreed to share equally the law practice's profits and losses, though they failed to present any documentation regarding this sharing arrangement. The brothers also agreed that they could withdraw money from the checking account. Any money withdrawn from the account other than money they earned for their legal services was considered "borrowed." The taxpayers failed to report any money they withdrew, however, as income for providing legal services and they also failed to provide any loan documents, notes, or any other investment account records evidencing loan transactions between the brothers and the entity's checking account. Taxable deposits for the year at issue totaled $1.4 million; the brothers withdrew in excess of $1 million from the account, transferring the money to numerous other accounts with no business explanation. No records were kept of the transfers. The wife of one of the brothers represented that she received a salary of $52,000 for one mortgage application, and deposited $138,000 into her personal bank account, but failed to report any wage or self-employment income on any tax return for the year. The taxpayers reported no distributions on the K-1 for the partnership return. The Tax Court sided with the IRS in finding the taxpayers had substantial amounts of unreported income based on the bank deposits method the IRS used to reconstruct the taxpayers' income. In addition, the Court held that the IRS proved, by clear and convincing evidence that the taxpayers fraudulently understated their tax liabilities for the year. Finally, because of the findings of fraud, the Court found the limitations periods for assessing the taxpayers' taxes had not expired.
Tip of the Day
Inactive business? . . . You may have started a corporation, LLC or partnership and filed for a federal tax ID. Or you may have been filing business returns in the past, but this year you have no income and no expenses. Generally, you've still got to file a return. Even if there's no tax due, the IRS will be looking for that return. Despite the absence of a tax liability, there's a $89 per month late filing fee for S corporations and partnerships (and LLCs). There's a additional penalty of $50 per K-1 not provided to shareholders or partners on time. You'll probably owe penalties on any late filed state returns also. And failure to file a state return can cause even more troubles than not filing a federal return. Check with your accountant, tax advisor or attorney on how to terminate the entity.
February 26, 2010
News
The Senate has approved the Hiring Incentives to Restore Employment (HIRE) Act. The bill includes a payroll tax credit of $5,000 for businesses that hire individuals who have been unemployed for a long term. The bill provides a one-year extension of the higher Section 179 expensing limits.
In William Magdalin (2010-1 USTC 50,150; U.S. Court of Appeals, 1st Circuit) the Appeals Court affirmed the Tax Court's decision to deny a taxpayer medical expenses incurred for in vitro fertilization. The Court noted the expenses incurred were not for the treatment of any underlying medical condition suffered by the taxpayer. The taxpayer stipulated he was not infertile and that his previous children had been produced by a natural process. In addition, the procedures were not for the purpose of affecting any structure or function of taxpayer's own body.
Tip of the Day
Marginal vs. effective tax rate . . . What's the difference? Plenty. Your effective tax rate is your overall rate. You compute it by dividing your total income taxes (federal and/or state) by your income. While that's an interesting statistic, it's not what what's important in tax planning. Of more importance is your marginal tax rate--what you're paying on your highest income--or what a $1 of deduction will save in taxes. For example, Fred's taxable income is $145,000. Anything over $137,050 will put him in the 28% bracket (2010 amounts). Fred's marginal tax rate is 28%. (His effective tax rate is only 19.9%.) A $5,000 deduction will save him 28% in taxes, or 1,400. A $10,000 deduction will save him 2,738. That's because $7,950 (the difference between $145,000 and $137,050) is taxed at 28%; the remaining $2,050 is taxed at 25%. If Fred had a $10,000 deduction that he could split, and assuming he'll have approximately the same income each year, he'd be better off taking, say half in one year and half the next.
February 25, 2010
News
Taking a deduction on Schedule C will provide a full tax benefit; taken as a miscellaneous itemized deduction on Schedule A means you'll have to use the 2% of AGI threshold. In James L. Purdy et ux. (T.C. Memo. 2010-27) the taxpayer worked as financial advisor for a brokerage house. While working for the brokerage house he received a W-2 for his services. He did not file a Schedule C or pay any self-employment taxes on the earnings. He held himself out as employed by the firm. He had a falling out with the firm and was terminated and sued the firm, claiming wrongful termination and retaliatory discharge. He was awarded a $393,000 settlement and paid $120,000 to his attorney. After termination he established an LLP providing financial advisory services. He reported the $120,000 in legal fees as a deduction on Schedule C and only $1,717 in income. The Tax Court sided with the IRS in finding the taxpayer was an employee of the brokerage house. The Court dismissed the existence of the LLP between him and his assistant while he was employed at the brokerage house. The Court noted he made no mention of a partnership in his claim for fraudulent inducement nor in his claim for wrongful termination. The Court found the taxpayer brought his claim as an employee of the brokerage house and not in any trade or business other than his employment. He incurred the legal fees as an employee, making them deductible on as unreimbursed employee business expenses on Schedule A.
Tip of the Day
Mortgage assistance payments . . . If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. You cannot deduct the interest that is paid for you. On the other hand, these mortgage assistance payments are not includable in your income and do not reduce your other deductions, such as real estate taxes.
February 24, 2010
News
The Senate has approved a motion to move forward on President Obama's proposed $15-billion jobs package. It's anticipated that the bill will be introduced to the Senate Finance Committee. Included in the bill are tax extenders.
The Federal Emergency Management Agency (FEMA) has announced that taxpayers in the North Carolina counties of Alleghany, Ashe, Avery, Buncombe, Burke, Caldwell, Haywood, Jackson, Madison, McDowell, Mitchell, Watauga and Yancey are eligible for assistance under the Disaster Relief and Emergency Assistance Act as a result of severe winter storms and flooding beginning on December 18, 2009.
Tip of the Day
Claiming the First-Time Homebuyer Tax Credit? . . . The IRS recognizes that the settlement documents can vary from location to location, so here are five tips to clarify the documentation requirements.
The IRS has already encountered fraudulent claims. Failure to attach the required documentation is asking for trouble.
February 23, 2010
News
How you and your spouse hold jointly owned property can be important for estate tax purposes. In Estate of Oscar Goldberg et al. (T.C. Memo. 2010-26) the decedent executed deeds transferring his interest (a partial interest he held with other relatives) to "Oscar Goldberg and Judith Goldberg, as wife". The wife's did not explicitly mention the properties, but split her estate between the decedent and a trust. The decedent, as executor of his wife's estate, executed a deed conveying all of his wife's interests in the properties to the trust. The decedent did not execute or record any deed transferring his interest in either property. On Schedule E, Jointly Owned Property, of the estate tax return, the estate reported half of the interests owned by the decedent and his deceased wife. The IRS claimed the decedent owned the full share of the properties at death. The Court noted to determine property interests and rights it had to look to state law which states "A disposition of real property to a husband and wife creates in them a tenancy by the entirety, unless expressly declared to be a joint tenancy or a tenancy in common." (As in effect in 1977, the date of transfer.) In a tenancy by the entirety, each spouse has total possession of the property, and at one spouse's death the survivor takes the entire property because the survivor remains seized of the whole. Therefore, an interest held as a tenant by the entirety is not devisable (the wife could not leave it to someone in her will). The estate argued that decedent's wife owned the properties as a tenant in common with decedent, not as a tenant by the entirety, that half of the ownership interests became part of decedent's wife's estate upon her death, and that therefore only half of the above ownership interests are part of decedent's estate. The Court did not agree. It noted that if a error was made originally, it was correctable. The Court held the full share had to be included in the decedent's estate.
Tip of the Day
Contributions to Haitian relief . . . Taxpayers wishing to claim their Haiti relief donations on the 2009 tax return must make those donations by the end of this month. Individuals and corporations have until midnight on Sunday, Feb. 28, to make cash contributions to charities providing earthquake relief in Haiti. These contributions can be claimed on either a 2009 or 2010 return, but not both. Contributions made after that date but before the end of the year can only be claimed on a 2010 return. Contributions made by text message, check, credit card or debit card qualify for this special option. Donations charged to a credit card before the end of February count for 2009.
February 22, 2010
News
In Lee E. Newell et ux. (T.C. Memo. 2010-23) the IRS argued that the taxpayer's managing member interest in an LLC classified as a partnership was a limited partnership interest for purposes of applying the passive activity rules. That would deny the taxpayer a deduction for the losses against ordinary income. The LLC was a country club and the taxpayer was the managing member and responsible for all hiring and firing of management personnel. He also oversaw construction of the clubhouse, created and administered all membership programs and reviewed, approved, and signed all checks for expenses incurred in the construction and operation of the club (among other responsibilities). He was also liable on the loans for the business. He spent 400 to 450 hours actively engaged in the LLC's trade or business during the years at issue. The taxpayer was also the sole shareholder of a custom millwork business operated as an S corporation. During the years at issue he actively participated in that business between 250 and 350 hours a year. The IRS argued that the losses from both businesses were not currently deductible since they were passive activities. The Court noted the special rules for limited partnerships, that is, a limited partner is not treated as materially participating in the activity, but also noted the LLC was not a limited partnership. The Court cited Garnett and noted the taxpayer actively and substantially participated in the LLC's management. The Court also noted that the taxpayer significantly participated in both the LLC and the S corporation and that his aggregate participation in all significant participation activities (the S corporation and the LLC) in each of the years exceeded 500 hours. As a result, the Court held the taxpayer was treated as materially participating in both activities during the years at issue.
Tip of the Day
Self-employed health insurance . . . If you do business as a sole proprietorship, S corporation, partnership or LLC that files as a Schedule C or partnership return, you may be able to deduct your health insurance premiums on the front of Form 1040. There's a big advantage in doing so--you lower your AGI, potentially making it easier to qualify for a number of tax benefits that are phased out at higher income levels. If you're a more than 2%-shareholder in an S corporation, the plan must be established by the S corporation and it pays the premiums or you make the premium payments and the S corporation reimburses you. The premiums must be reported as income on your W-2. But if you were also eligible to participate in any subsidized health plan for any month or part of a month, amounts paid for health coverage for that month don't qualify. For example, your spouse worked for Madison Inc. for the first six months of 2009 and was eligible to participate in the company's plan by paying $60 per month. You were self-employed for the whole year and paid $12,000 for a policy to cover the both of you. Only payments during the last six months of 2009 qualify. Long-term care insurance premiums may also qualify, but there's a limit. For more information, get IRS Publication 535, Business Expenses.
February 19, 2010
News
The IRS has released the following updated publications:
Refinancing a rental or business property? . . . If you refinance your personal residence with a loan larger than the outstanding principal on the existing mortgage, interest on the excess is generally not deductible. There are some exceptions--if the money is used to improve the residence or it qualifies as a home equity loan ($100,000 or less). With rental or business property the same rules generally apply, but the home equity exception isn't available. Refinance for more than the existing loan and the interest on the excess is not deductible unless the excess funds are used to improve the property. For a business, the interest is deductible if the excess funds are used by the business. However, in both cases, if the funds are diverted to personal use, the interest isn't deductible. The same rules generally hold for points paid on the refinancing.
February 18, 2010
News
The Department of Justice has ventured beyond UBS in its efforts to prosecute taxpayers with hidden offshore bank accounts. A Virginia surgeon has pleaded guilty to hiding funds in a Swiss bank account in a bank with headquarters in England. The taxpayer conspired with an attorney and banker in Switzerland to conceal his interest in the account and took elaborate steps to transfer the funds to the U.S. The account consisted of only about $250,000, but the taxpayer faces a fine up to $500,000 and up to 10 years in prison.
In a recently released report, the Congressional Research Service noted that temporary increases in the AMT exemptions expired at the end of 2009. If legislative changes do not extend the expired changes, then the number of taxpayers subject to the AMT will rise from around 4 million in 2009 to 27 million in 2010. Taxpayers with incomes in the $100,000 to $500,000 income range will be the hardest hit: 88% of these taxpayers will be subject to the AMT in 2010. Itemized deductions for state/local taxes (62.7%), personal exemptions (22.4%), and miscellaneous itemized deductions (11.4%) together account for 96% of the preference items that are subject to tax under the AMT but not subject to tax under the regular income tax. As a result, over certain income ranges, taxpayers who claim itemized deductions for state/local taxes, miscellaneous deductions, and/or have large families are more likely to fall under the AMT than taxpayers who do not have these characteristics.
Tip of the Day
Take the gain . . . Normally, a taxpayer wants to defer any gain as long as possible. For example, a like-kind exchange will allow you to dispose of property and acquire replacement property without having to pay tax on the potential gain. But if you've had a particularly bad year, you may want to recognize the gain. For example, your pickup truck was totaled in an accident in 2009. While it was only three years old it was fully depreciated. The insurance company gave you $17,500. If you replace the truck, you can avoid recognizing the $17,500 gain, but you're basis in the truck will be only the amount you put in over the $17,500. And, for 2009, your business had a $150,000 loss and it's unlikely you'll get full benefit for the loss for some time. Rather than claim replacement of the truck, report the gain and purchase a new truck where you can depreciate the full cost. Similarly, if you sold property on the installment basis, there are several ways to report the gain. Talk to your tax advisor. He may just assume you want to defer the gain.
February 17, 2010
News
Revenue Procedure 2010-18 (IRB 2010-9) provides the depreciation deduction limitations for owners of passenger automobiles first placed in service, and amounts to be included in income by lessees of passenger automobiles first leased, during calendar year 2010. This revenue procedure includes tables detailing these depreciation limitations and lessee inclusion amounts that reflect the automobile price inflation adjustments required by Sec. 280F(d)(7). Go to our Vehicle Tables page for the new depreciation limitations and an example. (We'll publish the new lease inclusion tables shortly.)
Tip of the Day
Completing Schedule M for retirees . . . The IRS is reminding taxpayers that a one-time payment of $250 was made in 2009 to recipients receiving benefits from the Social Security Administration, disabled veterans receiving benefits from the U.S. Department of Veterans Affairs, and Railroad Retirement beneficiaries. Taxpayers who need verification about receipt of the 2009 economic recovery payment should personally contact their respective agency for confirmation, not the IRS, before completing and filing their 2009 tax return.
February 16, 2010
News
The Senate has passed a bill that would limit the reportable transaction penalties under Sec. 6707A. Instead of penalties of fixed amounts of $100,000 per individual and $200,000 for other taxpayers, the penalties would be equal to 75 percent of the tax savings achieved from the transaction and minimum penalties of $5,000 per transaction for individuals and $10,000 for businesses. There would be a cap on penalties of $100,000 per transaction for individuals and $200,000 for businesses.
Tip of the Day
IRS guidance on signature requirements for homebuyer credit form . . . The IRS has provided additional clarification regarding documentation requirements on the First-Time Homebuyer Credit. The IRS encourages buyers seeking the homebuyer credit to sign the settlement statement when they file their tax return--even in cases where the settlement form does not include a signature line. The IRS recognizes that elements of the settlement document, often a Form HUD-1, may vary from jurisdiction to jurisdiction and may not reflect the signatures of both the buyer and seller. While the Form 5405 instructions indicate that a properly executed settlement statement should show the signatures of all parties, the IRS has clarified that it will accept a settlement statement if it is complete and valid according to local law. In areas where signatures are not required on the settlement document, the IRS encourages the buyer to sign the settlement statement prior to attaching it to the tax return. In situations where the signature of the seller is not on the settlement document, the IRS advises the buyer to still sign the document.
February 12, 2010
News
The Senate is working on a new bill, The Hiring Incentives to Restore Employment Act. The main provision would provide an exemption from the payroll tax for employers who hire individuals who have been unemployed for at least 60 days and an additional $1,000 credit for new employees who remain on the employer's payroll for 52 weeks. Included in the bill is an extension of the higher expensing limits for Section 179 and include a limited number of other provision.
The cost of cosmetic surgery is generally not deductible. An exception is made if the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease. The law defines cosmetic surgery as any procedure which is directed at improving the patient's appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease. In Rhiannon G. O'Donnabhain (134 T.C. No. 4) the taxpayer, after being diagnosed with severe gender identity disorder (GID). Medical professions who treat this disorder prescribe, depending on severity, administration of feminizing hormones, and, after living as a female in public, sex reassignment surgery and breast augmentation surgery. The taxpayer claimed a medical expense deduction for the surgeries and feminizing hormones. The IRS disallowed the deduction on the grounds that while GID is a mental disorder, it is not a disease. The Court found otherwise. It held GID is a disease, and the hormone therapy and sex reassignment surgery were for the treatment of a disease and were not cosmetic surgery. Thus, those expenses were deductible. The Court also found that the breast augmentation surgery was directed at improving her appearance and not deductible.
Tip of the Day
Collect unemployment in 2009? . . . Unemployment compensation is taxable (worker's compensation is not). But for 2009, you can exclude the first $2,400 of benefits. If both you and your spouse received unemployment compensation during the year, you can each exclude $2,400. Simply subtract $2,400 from the reported benefits--but don't report less than zero. For example, you received $5,200 in benefits during the year. You need only report $2,800 ($5,200 - $2,400). If you're using software to prepare your return, you'll probably be required to report the full amount--the program will exclude the appropriate amount.
February 11, 2010
News
If you are unable to pay the full amount due you owe the IRS, you may be able to secure an offer-in-compromise. In Remington P. Fairlamb (T.C. Memo. 2010-22) the taxpayers made several offers, all of which were eventually rejected by the IRS. The taxpayers felt the IRS abused its discretion and went to Tax Court. The IRS argued that the offer-in-compromise was properly rejected because of the taxpayer's alleged "long history of non-compliance and his affirmative tax avoidance actions". In making this argument, the IRS cited section 301.71221(b)(3)(iii), Proced. & Admin. Regs., which provides: "No compromise to promote effective tax administration may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws." Because the taxpayer's various offers were all based on doubt as to collectibility rather than effective tax administration, this regulatory provision is not, by its terms, applicable. In any event, the Court did not believe that the IRS's ultimate determination, as explained in the notice, could fairly be construed as predicated on this rationale. In initially recommending the taxpayer's third offer, the settlement officer expressed no concern about this issue, and there is no indication in the record that this consideration played any role in the decision to overturn the settlement officer's initial recommendation. The Court held that in the light of the inadequacy of the reasons given in the notice for rejecting the taxpayer's third offer, which the settlement officer, with seemingly more soundly reasoned analysis, had initially recommended accepting, the Court was unable to conclude whether it was an abuse of discretion for the IRS to determine to proceed with the proposed collection action for the taxpayer's tax liabilities. The Court remanded the case to the IRS's Appeals Office for further consideration and clarification and to allow the taxpayer, if he wished, to propose a new collection alternative.
Setting up a family limited partnership can have both tax and nontax benefits. But if you want the tax benefits of lower estate taxes, you've got to plan ahead and follow the guidelines carefully. In Estate of Charlene B. Shurtz et al. (T.C. Memo. 2010-21) the decedent transferred interests in a large number of acres of timberland into a limited partnership. The transfer occurred after the decedent discussed with an attorney their desire to protect the assets from a judgment creditor (who would have a right to distributions, but not be able to seize the assets) and allow the business to be managed efficiently rather than have a large number of undivided interests. Estate tax savings were also a consideration. The IRS contended that the values of the assets contributed to the limited partnership were includable in the value of the decedent's gross estate by reason of her retention of the control, use, and benefit of the transferred assets within the meaning of Sections 2036 and/or 2035(a). On the other hand, the IRS contended that for purposes of Section 2056(a), the value of the decedent's interest in the limited partnership should be used to determine the amount of the marital deduction. The taxpayer argued that the decedent left no taxable estate because her entire estate was left first to a unified credit trust (formed to use the unified (exemption) credit) and then to various marital trusts. Further, the taxpayer contended that Section 2036(a) did not apply because the decedent's transfer of assets to the partnership constituted a "bona fide sale for an adequate and full consideration" within the meaning of that provision. The Court sided with the taxpayer, finding that although reducing estate tax was a motivating factor in establishing the partnership, the decedent had valid and significant nontax reasons for establishing the partnership. These reasons were "actual motivation" and not merely a "theoretical justification" and the Court found that the transfer of property to the limited partnership constituted a bona fide sale. It also found the transfer was made for adequate and full consideration. The Court held the values of the assets transferred to the limited partnership were not includable in the decedent's gross estate.
Tip of the Day
Deduct home computer? . . . You may be able to depreciate your home computer if you use it to produce income. For example, to manage your investments (that produced taxable, not tax-exempt, income). Two cautions. One, you must use the straight line method over the Alternative Depreciation System (ADS) recovery period. Two, if you use the machine for both investment and personal purposes, you can only depreciate the investment portion.
February 10, 2010
News
The IRS has recently released updated versions of the following publications:
In Kelly J. Maselli (T.C. Memo. 2010-19) the taxpayer argued that the Appeals Office's settlement officer abused her discretion by rejecting the taxpayer's installment agreement proposal and making a determination without considering all information that the taxpayer supplied. The IRS asserted that the taxpayer did not produce all of the required financial information. The settlement officer determined that petitioner provided insufficient information regarding the taxpayer's interest and/or equity in real estate properties and a car. Accordingly, the settlement officer rejected petitioner's proposed collection alternative. Section 6330 requires the Appeals conferee to consider information the taxpayer presented. The record showed the settlement officer reviewed the material presented, and denied the taxpayer's installment agreement proposal because she could not make an accurate determination regarding the taxpayer's equity in assets and corresponding ability to make a one-time payment to fully or partially satisfy balance due accounts. The Court concluded that because the settlement officer duly considered all the information that the taxpayer submitted, she did not abuse her discretion in this regard. The taxpayer also argued that the settlement officer abused her discretion by not providing the taxpayer with a reasonable opportunity to supply requested information. The Court noted that no statutory or regulatory provision requires that taxpayers be afforded an unlimited opportunity to supplement the administrative record. The statute only requires that a taxpayer be given a reasonable chance to be heard prior to the issuance of a notice of determination.
Tip of the Day
Investment expenses . . . You may be able to deduct investment expenses such as investment advisory fees, fiduciary fees, publications, etc., but only if they relate to producing taxable income (and exceed the threshold). If the expenses are incurred in producing tax exempt income, they are not deductible. If you can't associate the expenses with the income, you must apportion the expenses based on the income produced. The same rules apply for interest on funds borrowed to generate the income.
February 9, 2010
News
The IRS has posted changes to the following forms and publications at it's Web site:
In order to deduct auto related expenses, you must substantiate the amount of the expense, the time and place of the travel, and the business purpose. Generally auto expenses must be disallowed in full unless the taxpayer satisfies all three requirements. To satisfy the adequate records requirement, a taxpayer must maintain records and documentary evidence that in combination are sufficient to establish each element of an expenditure or use. In Douglas Arthur Royster (T.C. Memo. 2010-16) the taxpayer claimed approximately 60,000 business miles per year for each of the three years at issued. The log for the first year was lost, but the taxpayer had logs for the other two years. The log contained the beginning and ending mileage for each day, but did not note each place he stopped or the business purpose of the stop. The taxpayer testified in court, but the Court noted his testimony was vague, unspecific, and unpersuasive as to the business purpose of the trips. The Court sided with the IRS in denying the taxpayer's deductions for the years at issue, despite the existence of the logs.
Tip of the Day
Investment-related seminars . . . They're simply not deductible, no matter how valuable they might be. The rule is no deduction for attending a convention, seminar, or similar meeting for investment purposes.
February 8, 2010
News
The IRS has released the 2010 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws. Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 80-page document, The Truth about Frivolous Tax Arguments. Highlights include cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes and injunctions against preparers and promoters of false fuel tax credit schemes.
Revenue Procedure 2010-17 (IRB 2010-8) provides guidance to individuals who fail to meet the eligibility requirements of Section 911(d)(1) because adverse conditions in a foreign country preclude the individuals from meeting those requirements. A current list of the countries for tax year 2009 and the dates those countries are subject to the Section 911(d)(4) waiver is provided.
In Sivatharan Natkunanathan (T.C. Memo. 2010-15) the IRS determined a deficiency and an addition to tax under Sec. 6651(a)(1) for failure to file on time. In response, the taxpayer claimed a qualified business stock exclusion under Sec. 1202, deductions for uncollected software development invoices under Sec. 165 as business losses or, alternatively, under Sec. 166, as bad debt losses, and deductions for meals and entertainment, advertisement, rent, and utilities expenses under Sec. 162. The Tax Court held the taxpayer could not claim a Sec. 1202 qualified business stock exclusion to shield from tax any part of the proceeds from the sale of stock acquired upon exercise of employee stock options where the taxpayer has not established that either the options or the stock constituted qualified small business stock within the meaning of Sec. 1202. The Court also held the taxpayer could not deduct billed and unreceived amounts that have not been previously included in income. The Court also held the taxpayer could not deduct as business expenses meals and entertainment, advertisement, rent, and utilities expenditures that are substantiated solely by a log of such expenditures and in the absence of any primary evidence (receipt, proof of payment, invoices, etc.) of having made such expenditures.
Tip of the Day
Home security system . . . It's not deductible as a miscellaneous itemized deduction on Schedule A, but you may be able to deduct a percentage of the cost if you use a portion of your home for business.
February 5, 2010
News
The hiring tax credit of $5,000 proposed by President Obama may have support in the Senate, but House Democrats are less enthusiastic. Hopefully, resolution of differences will come sooner rather than later.
The IRS has posted to its Web site at www.irs.gov/taxpros/article/0,,id=218611,00.html a list of frequently asked questions relating to the proposed new requirements for tax return preparers. The posting includes new questions (dated February 2, 2010) and prior questions posted January 22, 2010. The posting makes it clear that the only preparers that can avoid competency testing are attorneys, CPAs, licensed public accountants (in specified states) and enrolled agents who are active and in good standing.
Tip of the Day
Bonds bought and sold between interest dates . . . If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. You must report that part of the sales price as interest income for the year of sale. If you buy a bond between interest dates, part of the purchase price represents interest accrued before the date of purchase. When that interest is paid to you, you should treat it as a return of your capital investment rather than interest income by reducing your basis in the bond.
February 4, 2010
News
When the shareholder of a corporation wants to sell the business he prefers to sell the stock to secure long-term capital gain treatment. The buyer, on the other hand, wants to purchase assets to get a step-up in basis so that the purchase price can be quickly written off in the form of depreciation and amortization. In Enbridge Energy Company Inc. (2009-2 USTC 50,737; U.S. Court of Appeals, 5th Circuit) the Court upheld a District Court decision that a transaction was an abusive tax shelter. A corporation's sole shareholder sold his stock to an intermediary, a shell corporation with no business purpose, who borrowed the funds for the acquisition from the final buyer. Immediately thereafter, a buyer purchased the corporation's assets with a step-up in basis.
The IRS can issue a third-party summons to secure records from a bank or other party you've had transactions with. You can file suit to quash the summons. In Oliver Wang, et al. (2009-2 USTC 50,744; U.S. District Court, West. Dist. Wash.) the IRS issued summonses to warehouse club seeking documents regarding business transactions between the company and the taxpayers. Despite the fact the IRS requested records for five years and the taxpayers were under audit for only one year, the Court refused to quash the summons finding the investigation was for a legitimate purpose, that the documents being requested were relevant to the audit and the summonses were not overbroad.
Tip of the Day
New forms for 2009 return . . . There are two new forms this year. One, Schedule M, Making Work Pay and Government Retiree Credits, may give you a $400 credit ($800). The credit isn't available to higher income individuals and you generally must have earned income. If you use tax preparation software, the program should handle all the details. The second form is Schedule L, Standard Deduction for Certain Filers. If you're taking the standard deduction you can increase it by the amount of your real estate taxes, new motor vehicle taxes, or a net disaster loss. This one is easier to miss, but the savings can be significant.
February 3, 2010
News
Notice 2010-19 (IRB 2010-7) applies to taxpayers making gifts in trust during 2010. Under section 2511(c), a transfer of property to a non-wholly-owned grantor trust is a transfer by gift of the entire interest in the property. To determine whether a transfer to a wholly-owned grantor trust constitutes a gift, the gift tax provisions in effect prior to 2010 apply.
Under President Obama's proposed budget the IRS will get a increase in funding for enforcement (with a significant part of the increase for combating offshore tax evasion and high wealth taxpayers), taxpayer service, and technology improvements. The budget provides nearly $250 million in new enforcement initiatives to improve compliance. The technology improvements are aimed at completing development of the new taxpayer account database and to update the electronic filing system. Some of the enforcement money will be going to increase staff in that area.
Tip of the Day
Safe deposit box rent . . . Chances are you won't be able to meet the 2% threshold for deducting miscellaneous itemized deductions, but if you do you may be able to add safe deposit box rent. But in order to qualify, the box must be used to store taxable income-producing stocks, bonds, or investment-related papers and documents. You cannot deduct the box rent if you use it only for jewelry, tax-exempt securities, your will, or documents related to your personal residence.
February 2, 2010
News
The Department of the Treasury has released a Greenbook, the General Explanations of the Administration's Fiscal Year 2011 Revenue Proposals. The proposals include extending the tax cuts that expired at the end of 2009 including the increased expense option and bonus depreciation and expanding the earned income tax credit and the child and dependent care tax credit. However, the proposed budget eliminates a number of oil and coal incentives and raises the tax rates on upper-income taxpayers. We'll be posting a list of the provisions. For the complete document go to www.treas.gov/offices/tax-policy/library/greenbk10.pdf.
The IRS is issuing temporary (REG-120692-09) and interim final (T.D. 9479) regulations under the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA). MHPAEA prohibits group health plans providing mental health or substance use disorder benefits along with medical/surgical benefits from imposing more restrictive financial requirements or treatment limitations with respect to the mental health or substance use disorder benefits than the predominant ones imposed with respect to substantially all medical/surgical benefits. The IRS is issuing the temporary regulations at the same time that the Employee Benefits Security Administration of the U.S. Department of Labor and the Centers for Medicare & Medicaid Services of the U.S. Department of Health and Human Services are issuing substantially similar interim final regulations with respect to MHPAEA for group health plans and issuers of health insurance coverage offered in connection with a group health plan under the Employee Retirement Income Security Act of 1974 and the Public Health Service Act. The temporary regulations provide guidance to employers and group health plans relating to the group health plan mental health and substance use disorder parity requirements.
Tip of the Day
Not all banks out of woods yet . . . While the biggest banks seem to be on the mend, the crisis may not have fully hit home yet at regional and some local banks. Regional banks may feel the impact of commercial loans. And there are still plenty of banks on the FDIC's watch list. (However, many small, local banks never left their conservative roots and are in good shape.) It still pays to watch your bank balances so they don't exceed the FDIC limit. And if you're in the processing of getting a loan, don't commit to spending the money until the funds are in your account. Finally, no matter how sure things look, always have a plan B.
February 1, 2010
News
The IRS has announced (IR-2010-16) that some taxpayers who file paper income tax returns will send them to different processing centers this year. Taxpayers in Maine, Maryland, Massachusetts, New Hampshire, Vermont, Virginia and the District of Columbia will now send their tax returns to the IRS Kansas City Service Center in Kansas City, Mo. Taxpayers in Indiana and Michigan will send their tax returns to the IRS Fresno Service Center, in Fresno, Calif. Taxpayers in Alabama will send their tax returns to the IRS Austin Service Center in Austin, Texas. The IRS continuously monitors work flow at its centers and makes appropriate adjustments by altering the volume of returns to be sent to each. For taxpayers who file paper returns, the correct center addresses are on labels inside the tax packages they receive in the mail. Taxpayers who do not receive a package and need the service center address should refer to the back cover of the instructions to Form 1040, Form 1040A and Form 1040EZ.
Tip of the Day
Hold off hiring and raises . . . That doesn't mean you shouldn't hire necessary staff, but you might want to put off any noncritical hires until there's more information on the President's small business jobs and wages incentive. The proposed tax credit would apply to net new hires (and salary increases above the inflation level). The question is from when--the date legislation is passed, from January 1, 2010, or from some other date? Hopefully, Congress will take action quickly. But, as always, business demands should take precedence over tax benefits.
January 29, 2010
News
In order to claim a travel expense deduction, a taxpayer must show that his expenses are ordinary and necessary, that he was away from home when he incurred the expense, and that the expense was incurred in pursuit of a trade or business. You must satisfy all three requirements. In James M. Minick et ux. (T.C. Memo. 2010-12) the taxpayer worked at various jobsites outside the area of his home because he could not find work nearby. Under Section 162, the term "'home' does not have its usual and ordinary meaning." This Court has interpreted a taxpayer's "home" under Section 162 to mean his principal place of employment and not where his personal residence is located. The Court must consider the "away from home" requirement "in light of the further requirement that the expense be the result of business exigencies". Where a taxpayer's principal place of employment is other than his residence and he chooses not to move his residence for personal reasons, his additional living and travel expenses are a result of that personal choice. Such personal expenditures cannot be deemed ordinary and necessary business expenses. An exception to the general rule does exist. A taxpayer may claim his personal residence as his home in situations where the taxpayer is away from his home on a temporary, rather than indefinite or permanent basis. If a taxpayer cannot show that he had both a permanent and temporary abode for business purposes during the year at issue, he is not entitled to the deduction. But this exception does not apply if the taxpayer has no tax home. An individual may be considered as an itinerant for purposes of section 162 if that individual has neither a principal place of business nor a place he resides permanently. The Court found that there was no business reason for the taxpayer tax home to be where he claimed his home to be. Indeed, the taxpayers had no business reason for maintaining the residence, there were no business ties to the residence. Thus, any duplicate living expenses were attributable to the taxpayers' personal choice and not dictated by the exigencies or demands of the taxpayer's business. The Court sided with the IRS finding the taxpayer was not "away from home" during the time at issue.
In Daryl Maassen et al. (2009-2 USTC 50,731; U.S. District court, No. Dist. Iowa, West. Div.) the Court held that the taxpayer could not recover his legal fees for an improper collection action by the IRS. The Court held the provision only applies to levies under Sec. 6331. The Court noted the seizure of the taxpayer's property was not an administrative seizure, but as a result of a foreclosure and sale.
Want to claim the Work Opportunity tax credit? The individual you're hiring has to certified by a state agency within the required certification period. In Manor Care, Inc. (2009-2 USTC 50,725; U.S. Court of Federal Claims) the Court dismissed the taxpayer's argument the individuals were automatically members of the targeted group because a request for certification had been made.
Tip of the Day
Repayments of income . . . If you repay an amount that you included in income in an earlier year, you may be able to deduct on Schedule A the amount you repaid. If the amount repaid was ordinary income of $3,000 or less, the deduction is subject to the 2% limit. If the amount is more than $3,000 and at the time you included the amount in income, you thought you had an unrestricted right to it, you may be deduct it under the claim of right rule.
January 28, 2010
News
Revenue Procedure 2010-15 (IRB 2010-7) updates Rev. Proc. 2008-14, and identifies circumstances under which the disclosure on a taxpayer's income tax return with respect to an item or a position is adequate for purpose of reducing the understatement of income tax under Section 6662(d); (relating to the substantial understatement aspect of the accuracy-related penalty), and for the purpose of avoiding the tax return preparer penalty under Section 6694(a) (relating to understatements due to unreasonable positions) with respect to income tax returns.
In Anonymous (134 T.C. No. 2) the taxpayer requested a private letter ruling (PLR) from the IRS. The IRS informed the taxpayer that he would be issuing a PLR adverse to his interests. The taxpayer declined to withdraw the request for a PLR. Before the IRS publicly released the PLR, the taxpayer petitioned the Tax Court, alleging that the PLR was arbitrary and capricious and that the IRS failed to delete certain terms in the PLR that tended to identify the taxpayer. The taxpayer asked the Court to order the IRS not to disclose the PLR or, in the alternative, order the Service to delete certain terms from the PLR. The IRS moved for summary judgment and argued that the Court lacked jurisdiction to prevent it from disclosing the PLR at issue and that none of the terms in the PLR would tend to identify the taxpayer. The Court held that its jurisdiction is limited to making a determination with respect to whether certain terms in the PLR are required to be deleted before publication. Therefore, it granted the IRS's motion for summary judgment in part. The Court further held that because a question of fact remained whether certain terms in the PLR tended to identify the taxpayer, it denied the IRS's motion for summary judgment in part.
Tip of the Day
First-time homebuyer credit and related parties . . . A taxpayer who purchases a home from certain related parties is not eligible for the first-time homebuyer credit. The purchase of a home from the taxpayer's parents would not qualify. Related persons also include an executor of an estate and a beneficiary of the estate, except for a sale or exchange that satisfies a pecuniary bequest (Sections 36(c) and 267(b)(13) of the Code).
Copyright 2010 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536