News On The Tax Front--The latest tax news.
In Brief:--Tax, business, and personal finance tips.
Previously Reported In Daily Update
The House has approved, by a vote of 413 to 0, to raise the death benefit to survivors of U.S. military members killed in the line of duty to $12,000 from $6,000 and to raise the tax-free treatment of the benefit to $12,000 from $3,000.
In limited situations, taxpayers filing joint Federal income tax returns may be relieved from joint and several liability pursuant to section 6015. In Zenobia Elisia Clary Ziegler (T.C. Memo. 2003-282) the taxpayer argued that the IRS abused its discretion in denying innocent spouse relief. The Court sided with the IRS. The Court noted the taxpayer would not suffer economic hardship if she was denied relief; the taxpayer's income is the sole basis for the deficiency; and the taxpayer knew that her earned income was not included on the 1998 joint return.
Just because you have losses doesn't mean the IRS can disallow their deduction under the hobby loss rules. However, you'll have to show that you tried to turn a profit. In George R. and Barbara H. Burrus (T.C. Memo. 2003-285) the taxpayers were able to convince the Court that, despite 6 years of losses in their cattle breeding activity, they engaged in the project with an honest profit motive. The Court noted that there was significant growth in the size of the herd, they kept good records, hired competent advisers, and changed tactics when the failed to make a profit. The Court found that the holding of the land and the cattle breeding were a single activity. Thus, the potential appreciation in the land could be used in the determination of a profit objective.
In a letter to the IRS, the Small Business Administration is urging the IRS to expand the scope of the regulations that allow higher depreciation limits on light trucks and vans to include light trucks and vans that are not modified or manufactured for a specialized business or trade purpose for which an appropriate business or trade requirement can be substantiated.
You can't just assign income to a trust and make the trust liable for the taxes. In Michael T. Carey and Leone R. Carey (T.C. Memo. 2003-281) the Court held trusts to be shams for federal tax purposes since the grantors retained control and enjoyment over the properties. The taxpayers controlled and dealt with the alleged trust property as if it were their own. The taxpayer retained substantial enjoyment of the trust property as shown by the fact that he had signature authority over the bank accounts of the trusts in 1996 and for part of 1997, and that he paid his personal expenses from those bank accounts in 1997. The trustee (another party) allowed the taxpayer to do so. The trustee did not act as an independent trustee or control any aspects of taxpayers' trusts. The Court held the taxpayers did not respond to a request for admissions from the IRS. Since a response was not received, the Court deemed the taxpayers to have admitted to certain facts stated in the Service's request for admissions. Finally, the Court held the taxpayers liable for a delay penalty for maintaining frivolous arguments.
The House Ways and Means Committee has voted out the replacement for the FSC Repeal and Extraterritorial Income Exclusion Act of 2000 (ETI). The bill has a long way to go and may not make it to the conference committee. It would:
In JS-945 the IRS announced that it is continuing discussions to revise the current tax treaty between the U.S. and Barbados.
The IRS announced (IR-2003-126) special tax relief for Southern California residents in the Presidential Disaster Area that was struck by wildfires beginning Oct. 21, 2003. The disaster area counties are: Los Angeles, San Bernardino, San Diego and Ventura. The FTD (Federal Tax Deposit) Penalty Waiver Period for employment and excise tax deposits is Oct. 21 - Nov. 7, 2003. The Extension Period for returns and other tax payments is Oct. 21 through Dec. 29, 2003. The Disaster Designation for this area is "CA Wildfires". Taxpayers should mark certain relief-related forms with this designation. For the purposes of this tax relief, affected taxpayers include individuals and businesses located in the disaster area, those whose tax records are located in the disaster area, and relief workers. The same relief will also apply to any places added to the disaster area. The IRS gives affected taxpayers until the last day of the Extension Period to file tax returns or make tax payments, including estimated tax payments, that have either an original or extended due date falling within this Period. The IRS will abate interest and any late filing or late payment penalties that would apply during these dates to returns or payments subject to these extensions. The IRS also gives affected taxpayers until the last day of the Extension Period to perform certain other time-sensitive actions described in Reg. Sec. 301.7508A-1(c)(1) and Rev. Proc. 2002-71, 2002-46, that are due to be performed during this Period. This relief includes the filing of Form 5500 series returns. This extension to file and pay does not apply to information returns, or to employment and excise tax deposits. However, the IRS may abate penalties on such deposits for affected taxpayers due to reasonable cause during the FTD Penalty Waiver Period, provided they make the payment by the last day of that period. To qualify for this relief, affected taxpayers should put the assigned Disaster Designation in red ink at the top of the return, except for Form 5500, where filers should check Box D in Part 1 and attach a statement, following the form’s instructions. Individuals or businesses located in the disaster area--or taxpayers outside the area that were directly affected by this disaster--should contact the IRS if they receive penalties for filing returns or paying taxes late. Affected taxpayers in a Presidential Disaster Area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors. Affected taxpayers claiming the disaster loss on a last year’s return should put the Disaster Designation in red ink at the top of the form so that the IRS can expedite the processing of the refund. The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers who need them to apply for benefits or to file amended returns claiming casualty losses. Such taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506 (Request for Copy or Transcript of Tax Form) and submit it to the IRS. Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.
The IRS has announced (Announcement 2003-68; IRB 2003-45) a delay of the implementation of the new rolling renewal schedule for enrolled agents to renew their enrollment. To ensure an orderly transition to rolling renewals, the implementation of the new renewal of enrollment schedule for affected enrolled agents will be delayed until the 2004 calendar year. The Service will publish the schedule for affected enrolled agents to apply for renewal of enrollment in the Internal Revenue Bulletin and on the Office of Professional Responsibility webpage at www.irs.gov/taxpros/agents/index.html at least 30 calendar days prior to the beginning of the period for renewal of enrollment and no later than June 1, 2004. The period for renewal of enrollment will last at least 60 calendar days, but no more than 90 calendar days.
The IRS has issued Rev. Proc. 2003-74 (IRB 2003-43) which revokes Rev. Proc. 66-3, 1966-1 C.B. 601, Rev. Proc. 84-71, 1984-2 C.B. 735, Rev. Proc. 85-56, 1985-2 C.B. 739, Rev. Proc. 87-21, 1987-1 C.B. 718, Rev. Proc. 94-52, 1994-2 C.B. 712, and Rev. Proc. 97-11, 1997-1 C.B. 630, which describe procedures previously used by the IRS for providing copies of returns and return information pursuant to Sections 6103 and 6104. These procedures have been superseded by current IRS practices. The current procedures are described in section 601.702(d)(1), (3), (4), and (5) of the Statement of Procedural Rules and on the forms used to request copies or inspection of returns and return information.
In Townsend Industries, Inc. (2003-2 USTC 50,666; U.S. Court of Appeals, 8th Circuit) the Court of Appeals reversed a District Court ruling in finding that a fishing trip paid for by the company was a working condition fringe benefit, excludable from the employees' incomes. The Court also found that expenses incurred by the company in connection with the fishing trip were properly deductible business expenses. The taxpayer was able to show the value of the trips.
Section 355 of the Code provides that no gain or loss will be recognized by a corporation on any distribution to which Section 355 applies. To qualify as a distribution described in Sec. 355, a distribution must, in addition to satisfying the statutory requirements of Sec. 355, satisfy certain requirements in the regulations, including the business purpose requirement. Section 1.355-2(b)(1) provides that a distribution must be motivated, in whole or substantial part, by one or more corporate business purposes. A corporate business purpose is a real and substantial non-federal tax purpose germane to the business of the distributing corporation, the controlled corporation, or the affiliated group to which the distributing corporation belongs. For example, in small corporations, the IRS has often held that distributing the stock of a subsidiary to a relative so that the individual can manage the subsidiary and pursue goals separate from other family members is a valid business purpose. In Rev. Rul. 110 (IRB 2003-46) the IRS held that in determining whether a distribution of the stock of a controlled corporation satisfies the business purpose requirement of Sec. 1.355-2(b) that the distribution be motivated, in whole or substantial part, by one or more corporate business purposes, the fact that Sec. 355 permits a distributing corporation to distribute the stock of a controlled corporation without recognition of gain does not present a potential for the avoidance of federal taxes under Reg. Sec. 1.355-2(b).
In Internal Revenue News Release IR-2003-125 the IRS reminded taxpayers they have until Dec. 5 to claim 115,744 undelivered checks from this summer’s advance child tax credit. After the December cut-off, taxpayers cannot claim the checks until they file their tax returns next year. In all, the IRS has money for more than 200,000 taxpayers whose income tax refund or advance child tax credit checks were undelivered and returned to the agency. Taxpayers need to update their addresses before the IRS can reissue the checks, which total more than $118 million. In addition to the 115,744 child credit checks worth more than $50 million, there were another 92,810 regular tax refund checks, those issued to refund tax overpayments, returned to the IRS as undelivered. To check on the status of your regular refund check, go to www.irs.gov/individuals/article/0,,id=96596,00.html. For the status of your advance child tax credit, go to www.irs.gov/individuals/article/0,,id=111546,00.html.
One of the reasons for transferring assets to a family limited partnership (FLP) is the reduced value in the partnership interests compared to the underlying assets. In Peter S. Peracchio (T.C. Memo. 2003-280) the taxpayer and the IRS disagreed on the amount of both the minority discount and the lack of marketability discount. The taxpayer's experts argued for a 7.7% (5% for the second expert) minority interest discount and a 35% (40%) marketability discount. The Service's expert came up with a 4.4% minority interest discount and a 15% marketability discount. Under the partnership agreement, a hypothetical buyer of all or any portion of the transferred interests would have limited control of his investment. For instance, such holder (1) would have no say in the partnership's investment strategy, and (2) could not unilaterally recoup his investment by forcing the partnership either to redeem his interest or to undergo a complete liquidation. The parties agree that the hypothetical "willing buyer" of a transferred interest would account for such lack of control by demanding a reduced sales price; i.e., a price that is less than the interest's pro rata share of the partnership's NAV. The Court held that a minority discount of 6% was appropriate. Each expert witness determined a minority interest discount for the transferred interests by reference to shares of publicly traded, closed end investment funds, which typically trade at a discount relative to their share of fund NAV. The idea is that, since such shares (by definition) enjoy a high degree of marketability, those discounts must be attributable, at least to some extent, to a minority shareholder's lack of control over the investment fund. The parties agree that, to reflect the lack of a ready market for the transferred interests, an additional discount should be applied to the partnership's NAV (after applying the minority interest discount) for purposes of determining the fair market value of those interests. Such a discount is commonly referred to as a "marketability discount". The parties disagree on the appropriate magnitude of that discount in the context of the transferred interests. The Court determined the marketability discount to be 25%.
In Square D Company and Subs. (121 TC--, No. 11) the Tax Court held that the corporation was entitled to amortization deductions for loan commitment and legal fees. The Court found the costs were incurred on the taxpayer's behalf and paid by the taxpayer. On a second issue, the Court determined the reasonable compensation of a number of employees of this publicly traded company.
The IRS, in response to a considerable outcry, has changed certain aspects of its Earned Income Tax Credit (EITC) Precertification Program. The program will send a new Form 8836 (Qualifying Children Residency Statement) to 25,000 high-risk taxpayers. Taxpayers selected will have to complete the one-page form (with 3 pages of instructions) and supply third-party affidavits or documents showing that the taxpayer lived with the child for more than half of 2003. That may require one or more documents. Not all of the taxpayers selected will follow the same procedures. Some randomly selected taxpayers will use other procedures.
The IRS has made corrections to proposed regulations relating to the computation and allocation of the credit for increasing research activities for members of a controlled group of corporations or a group of trades or businesses under common control. (REG-133791-02; REG-105606-99)
In Rev. Rul. 2003-106 (IRB 2003-44) the IRS held that an employer's expense reimbursement arrangement for deductible travel and entertainment expenses, which includes new procedures for the use of electronic receipts and expense reports is an accountable plan.
In Carl and Lisa Neugebauer (T.C. Memo. 2003-276) the taxpayers petitioned the Tax Court to review the Service's proposed collection activity in the form of a levy. The Court noted the taxpayers' did not dispute the amount of the liability. They submitted an offer in compromise and a collection information statement in connection with their request for a hearing. The Appeal officer determined that the offer in compromise should not be accepted because the offer and supporting financial information were incomplete. The taxpayers did not provide the complete information. The taxpayers did not dispute the existence or the amount of an underlying tax liability. The Court held the proper standard for review of the Service's determination is abuse of discretion. The determination of an Appeals officer must take into consideration (A) the verification that the requirements of applicable law and administrative procedures have been met, (B) issues raised by the taxpayer, and (C) whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection be no more intrusive than necessary. The Court found the Appeals officer addressed all these matters. As to the second requirement, the Court noted the officer asked for additional information, but the taxpayers failed to submit a properly completed Form 656, Offer in Compromise, and the required financial information.
Amounts received in a lawsuit for personal injury are nontaxable. That's a great incentive to arrange a settlement as a personal injury award. In Edward P. Knoll and Mary K. King-Knoll (T.C. Memo. 2003-277) the taxpayer was asked to resign from a partnership. He contended that a payment he received from the partnership was a result of arm's-length negotiations resulting in a settlement solely for his release of an intentional infliction of emotional distress claim. The Court found that, while the taxpayer suffered emotional distress as a result of the separation and negotiations for monetary damages, the insertion of the personal injury clause into the settlement agreement was motivated solely by tax considerations. In the same case, the Court found that advances made to the taxpayer were taxable income, not loans. The Court noted the partnership that advanced the funds did not intend to enforce the advances as loans. The amounts were includable in income in the year received.
The IRS has updated the per diem rules for substantiating expenses for lodging, meals, etc. (Rev. Proc. 2003-80; IRB 2003-45). Included are the new high-low per diem locales. We'll be updating our tables within the week.
The IRS has issued final regulations (T.D. 9093) providing rules regarding the application of the general entity classification rules to certain foreign business entities, in particular providing a rule that terminates the grandfathered status of certain foreign business entities upon a 50 percent change of ownership and a special rule that clarifies and further modifies the rules relating to whether the classification of certain foreign eligible entities is relevant for Federal tax purposes.
The Senate Finance Committee opened a hearing on abusive tax shelters on October 21. While much of the discussion is expected to center on tax shelters used by large corporations, any changes in the tax law that might result from the hearings are likely to have an effect on other taxpayers.
You may recover your litigation costs from the IRS if you are the prevailing party, have exhausted the available administrative remedies, and did not unreasonably protract the administrative or judicial proceeding. In Patricia P. Kean, et vir (T.C. Memo. 2003-275) the Tax Court, in a prior case, held that the amounts were alimony. In the original deficiency notices the IRS had taken inconsistent positions with respect to the payments a taxpayer made to his former wife. In the current case the Court held that the IRS could take an inconsistent position. The Court noted that to be a prevailing party, the taxpayer must substantially prevail with respect to either the amount in controversy or the most significant issue or set of issues presented. The law provides that a taxpayer shall not be treated as the prevailing party in any proceeding if the IRS establishes that its position in the proceeding was substantially justified. For purposes of Sec. 7430 a position of the IRS is substantially justified if it has a reasonable basis in both law and fact. The determination of the reasonableness of that position is based upon the available facts that formed the basis for the position, as well as any controlling legal precedent. The fact that the IRS ultimately concedes an issue does not, by itself, establish that his prior position with respect to that issue was unreasonable. However, it is a factor that may be considered. The Court denied the taxpayer litigation costs.
An employer who hires an individual belonging to one of 9 targeted groups may be entitled to a Work Opportunity Tax Credit equal to 40 percent of the individual's qualified first-year wages. An individual who is a qualified IV-A recipient is a member of a targeted group. In Rev. Rul. 2003-112 the IRS ruled in 4 situations on the certification as a qualified IV-A recipient of individuals whose family receives assistance for the required period if the individual is included on the grant for less than the specified period.
In limited situations, taxpayers filing joint Federal income tax returns may be relieved from joint and several liability pursuant to section 6015. In Issac Baranowicz, et al. (T.C. Memo. 2003-274) the Court granted the wife of a CPA innocent spouse relief. The Court noted the wife did not graduate from high school, only worked as a clerical employee for about ten years, then became a housewife and mother. She had no training in finance, tax, accounting, or business. While she knew of the existence of the investments, she had no substantive knowledge of the tax shelter partnerships. She relied on her husband's education and experience.
The law currently provides several tax incentives for U.S. companies who export products. Unfortunately, a number of countries have complained that such incentives violate free trade agreements. In an effort to resolve this, Congress is working on a bill to repeal and replace these incentives. Much controversy surrounds the bill and it has gone through a number of changes in committee. There are a number of arcane provisions, but the most important would reduce the top corporate tax rate for manufacturers and, in one version, also reduce the top rate for all small corporations. Other bills in Congress that have tax implications including an energy bill, a bill that would liberalize the rules with respect to charitable contributions and one that would make changes to the pension plan rules.
Depreciation and lease payments for luxury autos are limited. And, the Service's definition of luxury isn't generous. There's a big loophole. Vehicles built on a truck chassis that have a gross vehicle weight of 6,000 pounds or more are exempt from these limitations. While that's been the law for a number of years, only in recent times has the break been exploited so much. The recent increase in the Section 179 expense option limit and the 50% additional depreciation only makes the loophole more attractive. The benefit may not exist forever. The Senate Finance Committee is examining the issue.
The IRS, the Federal Trade Commission and state regulators have issued a consumer alert for those seeking assistance from tax-exempt credit counseling organizations. These organizations are urging consumers to be cautious when choosing a credit counseling organization. Many credit counseling organizations provide valuable advice, education and assistance to those seeking to better manage their debt. But an increasing number of complaints to federal and state agencies indicates that some organizations are engaging in questionable activities. Federal and state regulators are concerned that some credit counseling organizations using questionable practices may seek tax-exempt status in order to circumvent state and federal consumer protection laws. Consumers need to be wary of the "quick fixes" offered by some organizations. The FTC offered these tips:
For more information see Internal Revenue News Release IR-2003-120 and Fact Sheet FS-2003-17.
Discussions, documents, etc. between an attorney and a client is frequently privileged. Communications between accountants and clients receive much more limited protection. In The Black & Decker Corporation (2003-2 USTC 50,659; U.S. District Court, Dist. Md.) the Court held that certain documents created by the taxpayer's outside accountants were not protected under the attorney-client privilege. On the other hand, the Court sided with the taxpayer in holding that certain other documents were protected under the work-product doctrine.
If you're buying property you want to make sure there are no liens on it, or none that are unsatisfied at the time of closing. You'll need an attorney to check the law. One area of confusion has been federal tax liens where you know there is a statutory tax lien, but the lien has not yet been filed. In Rev. Rul. 2003-108 (IRB 2003-44) the IRS addressed such a situation. Under the facts presented, prior to becoming a purchaser, security interest holder, mechanic's lienor, or judgment lien creditor, a third party has actual knowledge of a statutory tax lien, with respect to which no notice of federal tax lien has been filed. The question was does actual knowledge of a statutory tax lien affect the lien priority of a purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor? The IRS ruled that a person having such knowledge is protected against a statutory tax lien.
The IRS has released (Rev. Proc. 2003-76; IRB 2003-43) the optional standard mileage rates to use in 2004 in computing the deductible costs of operating an automobile for business, charitable, medical or moving expense purposes. The mileage rate for business purposes has increased from 36 to 37.5 cents per mile. The standard mileage rate applies to cars, vans, pickups, and panel trucks. For deductible medical and moving purposes, the rate has increased from 12 to 14 cents per mile. For charitable purposes it remains at 14 cents per mile. The revenue procedure also changes the rules under which the standard mileage method can be used. In the past, if you used more than one vehicle at a time in your business, you had to use the actual expense method. (For example, you're a sole proprietorship with two vehicles. If both vehicles are in use at the same time, the standard mileage method is not available.) For 2004, you can have up to four vehicles in use at the same time.
The Social Security Administration has announced the cost-of-living adjustments for 2004. The maximum earnings taxable for social security (OASDI) purposes will be $87,900, a slight increase from the $87,000 for 2003.
The IRS has announced (IR-2003-122) the cost-of-living adjustments (COLA) applicable to dollar limitations for pension plans for tax year 2004. In addition to COLA increases, several limitations, set by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), are scheduled to increase at the beginning of 2004. For example, under EGTRRA, the limitation under section 402(g)(1) on the exclusion for elective deferrals described in section 402(g)(3) is increased from $12,000 to $13,000. This limitation affects elective deferrals to section 401(k) plans and to certain other plans. Effective January 1, 2004, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased from $160,000 to $165,000. The limitation for defined contribution plans under section 415(c)(1)(A) is increased from $40,000 to $41,000. The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $200,000 to $205,000. The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $130,000. The limitation used in the definition of highly compensated employee under Sec. 414(q)(1)(B) remains unchanged at $90,000. The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $450. The compensation amounts under Section 1.61-21(f)(5)(i) of the Income Tax Regulations concerning the definition of "control employee" for fringe benefit valuation purposes remains unchanged at $80,000. The compensation amount under Section 1.61-21(f)(5)(iii) is increased from $160,000 to $165,000. The limitation under Section 402(g)(1) for elective deferrals described in Section 402(g)(3) is increased from $12,000 to $13,000. The limitation for SIMPLE retirement accounts is increased from $8,000 to $9,000. The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $12,000 to $13,000. The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan (other than a plan described in Section 401(k)(11) or 408 (p)) for individuals aged 50 or over is increased from $2,000 to $3,000. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or 408 (p) for individuals aged 50 or over is increased from $1,000 to $1,500.
Rev. Proc. 2002-38 and Rev. Proc. 2002-39 provide procedures for a partnership or S corporation to change its annual accounting period if its current taxable year no longer qualifies as a natural business year (or, for certain S corporations, an ownership taxable year). The IRS has just issued Rev. Proc. 2003-79 (IRB 2003-45) which provides procedures under which a partner or S corporation shareholder of such a partnership or S corporation may elect to take into account ratably over four taxable years the partner's or shareholder's share of income from the partnership or S corporation that is attributable to the short taxable year ending on or after May 10, 2002, but before June 1, 2004.
The U.S. recently exchanged instruments of ratification for a new income tax treaty with the United Kingdom and new protocols for the income tax treaties with Australia and Mexico. The provisions for withholding tax with Mexico on dividends are effective for amounts paid or credited on or after September 1, 2003. For all other taxes, the treaty is effective for tax periods beginning on or after January 1, 2004. New tables replace the entries in Tables 1 and 2 in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities (For Withholding in 2003), and in Publication 901, U.S. Tax Treaties. For additional details see Announcement 2003-62 (IRB 2003-41).
On more than one occasions the IRS has voiced the possibility of using private collection agencies to collect outstanding taxpayer debts. In a recent broadcast of Tax Talk Today, the Service reported that the IRS would need 15 to 18 months from the passage of authorizing legislation to create the necessary technology to identify the most suitable cases.
You have certain rights before the IRS can levy on your property to collect taxes due. Section 6330(b) affords you the right to a hearing before an impartial IRS Appeals officer. Section 6330(c)(1) requires that the Appeals officer obtain verification that the requirements of any applicable law or administrative procedure have been met. Section 6330(c)(2)(A) provides that you may raise at the hearing "any relevant issue relating to the unpaid tax or the proposed levy" including spousal defenses, challenges to the appropriateness of collection actions, and alternatives to collection. You cannot raise issues relating to the underlying tax liability if you received a notice of deficiency for such tax liability or you otherwise had an opportunity to dispute the tax liability. In Edward H. and Anne G. Harrell (T.C. Memo. 2003-271) the taxpayers contended that the Appeals officer failed to present an adequate record for appellate review, and lacked impartiality as being a former member of the same office hearing the original collection due process appeal and denial of the taxpayers' offer in compromise. The Court sided with the IRS in finding the Appeals officer was impartial.
The law (Section 152(a)) defines the term "dependent" to include a son or daughter of the taxpayer "over half of whose support for the calendar year . . . was received from the taxpayer (or is treated as received from the taxpayer)". In addition. if a child of divorced parents receives over half of his support during the year from his parents and is in the custody of one or both parents for more than half of the year, then the child shall be treated as receiving over half of his support during the year from the parent having custody for a greater portion of the year. Custody is determined by the most recent decree of divorce. In the event of so-called 'split' custody, or if neither a decree or agreement establishes who has custody, custody will be deemed to be with the parent who, as between both parents, has the physical custody of the child for the greater portion of the calendar year. The IRS calculated that, under the divorce decree, the child was to be with the mother 4,996 hours or 57% of the year. But the taxpayer argued that he had physical custody 54% of the year. The taxpayer backed up his assertion with a log that provided detailed descriptions about the time he spent with and without his daughter each day of 1998, written in different ink and typed in different fonts. The IRS argued the log contained errors. Given the testimony of both the taxpayer and his ex-wife, the Court determined the taxpayer was a credible witness and that his log is valid and not fabricated. After giving consideration to the dates petitioner spent with his daughter that respondent claims are in error, petitioner still spent over 50 percent of the nights of the audit year with his daughter. The Court concluded, that he was the custodial parent for the year at issue and was entitled to the dependency exemption. (Kelly London McCullar; T.C. Memo. 2003-272)
Previously Reported In Daily Update
Know your customer . . . Whether you deal with a limited number of customers or have a huge base, you have to understand your customers. If you have a small number, you have the luxury of understanding them individually. You should know more than the fact that your customers want a quality product or low price. That's important, but you should be looking at more primal instincts. Try to sell a woman a poorly made dress or offer them something that's just a little out of date and you'll be in trouble. Do the same to your male customers and many won't notice. On the other hand, sell them a poorly made tool and you'll catch the devil. If you're selling to engineers, they'll be extra picky. If your customers are affluent, most will demand the best service and attention. Late shipments won't be tolerated. On the other hand, many won't care about the price so you can charge more for top quality products and service.
Right of election . . . In most states you can't cut your spouse out of your will. The surviving spouse has a right to file a right of election. In one state, the surviving spouse is entitled to the greater of $50,000 or 1/3 of the deceased spouse's estate plus any transfers made within one year of his or her death. That right can be waived only through a pre- or antenuptial agreement or in certain other limited situations.
Rental properties were closely held business . . . If the value of an interest in a closely held business included in determining the gross estate of a decedent exceeds 35 percent of the adjusted gross estate, the executor of the estate may elect to pay part or all of the estate tax in two or more (but not more than 10) equal installments (Sec. 6166). Spreading out the payments may avoid a severe cashflow problem. In addition, the interest on the unpaid balance is at a low rate. In a recent letter ruling (LR 200340012) the decedent had a number of rental properties, some of which were held in a partnership with his son and daughter. Decedent and his son, assisted by five part-time employees, performed all services in the management and maintenance of the properties. These activities included, but were not limited to, advertising vacant apartments, interviewing, screening and selecting prospective tenants, negotiating and executing leases, collecting rents, maintaining common areas, making ordinary plumbing and electrical repairs, purchasing appliances, supplies, and equipment, and inspecting rental units. Decedent and his son routinely devoted up to 14 hours a day on weekdays and several hours on weekends for maintenance and management of the properties. In addition, decedent and his son were on call twenty-four hours a day, seven days a week, for emergency repairs. On the rare occasions where repairs and maintenance were beyond the capabilities of decedent, his son, or the part-time employees, specialized workers were hired. The IRS held that the properties qualified as interests in closely held business under the law. In addition, the interests as a proprietor and partner could be treated as an interest in a single closely held business. (Note. This wasn't just a couple of rental properties. There were a number of parcels with over 140 rental units.)
Color does cost more . . . Manufacturers of color copiers and printers would like us to believe that color is only slightly more expensive than printing in black and white. That's rarely true. While the cost of the copiers and printers might not be much more higher, there are other costs to consider. The cost of supplies including toner and other consumables, ink cartridges, etc. are higher. So is the cost of maintenance on color machines. In some cases the breakdown frequency is higher. There are times when color is essential. If color helps you get the sale, it's worth it. But there are ways to keep the cost down. Do drafts in black and white if possible. Use color for the greatest impact--proposal covers, diagrams, photos, and particularly product photos. Use black and white for text. If you've got a 20 page proposal going to 50 people, with only the cover and two inside pages in color, print the text on a black and white machine and insert the color pages. It's much cheaper than running the whole 1,000 pages in color.
Late S election not allowed . . . An election to be an S corporation is required to be made within the first 2-1/2 months of the corporation's taxable year. The IRS can allow a late filed S election, if there was reasonable cause for the failure to make the election on time. However, the IRS won't allow a late election if the government's interests would be prejudiced. Generally, the interests of the government are prejudiced if granting relief would result in a taxpayer having a lower tax liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made. In a recent letter ruling (LR 200333017) the corporation thought a valid election had been made. It had a loss in year 1 which it allocated to the shareholder. The IRS disallowed the loss. The corporation then filed a Form 1120 (C corporation return) for year 2 and carried forward the disallowed loss. The corporation's taxable income for year 2 was reduced by the full amount of the loss carried forward. The statute of limitations on assessment for year 2 expired at the time the requested relief for the late S election. The IRS did not allow the late election to become effective. The corporation had claimed the full amount of the loss on it's year 2 Form 1120. Granting the S election request would allow the taxpayer to take the same loss twice.
Saving electric . . . Even in the cheapest regions, electricity is no longer as cheap as it once was. And it's more than likely it'll go up in the future. There are many ways to save, but turning off your computer at the end of the day is one of them. Power consumption varies, but the typical desktop machine uses about 250 watts. How much can you save? Assuming you turn the machines off for 12 hours every night and all weekend, at $0.16 per kilowatt hour, the saving amounts to about $216 a year. That's for just one machine. At $0.10 per kilowatt hour (a bargain rate), the saving is $136 per year. In the summer time or warm climates, the cost is more since the units produce heat that must be offset by more air conditioning. In the winter the extra cost is less, but this is not a cheap way to heat an office. Regular monitors use a considerable amount of power and also add heat. We haven't included that in the calculations. Flat panels save considerable electricity and produce little heat, but at the current price for a flat panel, the savings won't justify the cost.
Quick access to IRS help and products . . . The IRS has much information available by way of publications, forms, etc., but it's often hard to get at. Publication 2053 has information on how to find information on the Web, by fax, by telephone, on a CD-ROM, etc.
Single member LLC disregarded for tax purposes . . . The reason for using an LLC to operate your business is to insulate you personally from the liabilities of the business. Things get more complicated if you're the only member of the LLC. Unless you make a special election, the IRS treats the LLC as a disregarded entity. That makes things simple for filing income taxes. You report the income and expenses on Schedule C and attach it to your Form 1040, just like a sole proprietorship. For purposes of assessing federal employment taxes, IRS Notice 99-6 allows the single member owner to calculate, report, and pay the employment tax obligations under his own name and EIN. It also authorizes the disregarded LLC to separately calculate, report, and pay employment tax obligations incurred with respect to employees of the LLC under its own name and EIN. In an IRS Legal Memorandum (ILM 200338012) if the LLC is disregarded for federal tax purposes and having treated it like the taxpayer/single member owner for purposes of assessment, the IRS held that it would not be treated as an "other person" for purposes of collection.
Probate and taxable estate not the same . . . Many people confuse the term probate estate and taxable estate. Your probate estate does not include jointly owned property, property that's in a trust (even if it's revocable) for another beneficiary, property such as a IRA or other accountant where a person other than your estate is the named beneficiary, etc. Your taxable estate is much more encompassing. It includes all your property in which you had an interest on your death. It can even include property where you have a power of appointment, that is, where you can direct that a certain individual receive property even though you do not directly own the property. And, while avoiding probate may be important to you from a number of standpoints, whether or not property is subject to probate is usually much less important monetarily than whether the asset is includable in your taxable estate.
Product liability losses . . . Net operating losses can generally be carried back 2 years or forward 20. A special provision allows the portion of a net operating loss that qualifies as a specified liability loss may be carried back 10 years, rather than the normal 2-year carryback period. That can be a substantial benefit. The law defines a specified liability loss as a deduction attributable to product liability or expenses incurred in the investigation or settlement of, or opposition to, claims against the taxpayer on account of product liability. Product liability is defined as liability of the taxpayer for damages on account of physical injury or emotional harm to individuals, or damage to or loss of the use of property, on account of any defect in any product which is manufactured, leased, or sold by the taxpayer, but only if such injury, harm, or damage arises after the taxpayer has completed or terminated operations with respect to, and has relinquished possession of, such product. In recent Technical Advice (TAM 200341004) the taxpayer acquired a manufacturer of aircraft fasteners. The taxpayer was contractually obligated to produce the fasteners to certain specifications that included inspecting and testing them. The taxpayer represented they were tested, when, in fact, some were not. In addition, adequate records were not maintained in accordance with military and commercial requirements. The IRS held that the damages did not come under the definition of product liability and the 10-year carryback period did not apply.
Want to compare salaries? . . . Small businesses need to know what others are paying in order to avoid overpaying a job candidate or offering too little and losing a qualified one. Here are some sites that might help:
SalaryExpert.com www.salaryexpert.com Salary.com www.salary.com America's Career InfoNet www.acinet.org
Paying by card? . . . Use a credit card instead of a debit card. First, you'll have better control over your cash flow. Second, there's a much more protection if you use a credit card. That's even more true if you're dealing with a merchant you're not familiar with. You should be particularly careful with any card transaction on line. You're probably safe with major merchants, but you may want to use extra caution with a small vendor. Make sure they post an address and phone number. Then double check the listing using the phone book or the web.
Callable preferred stock . . . Preferred stock has been called a hybrid security. It has some of the characteristics of both common stock and debt. There are many advantages to preferred stock. It's generally safer than common and usually has a better yield than similar bonds. Moreover, the dividends may be taxed at a lower rate. But you've got to do your research. Some preferred stocks are "callable". That means the company can redeem them (but doesn't have to) at a designated time. You should be aware of any call feature since it can affect your yield. For example, Madison $6.00 preferred is selling at $105. The issue is not callable and there's 100 years to maturity. That means your yield is 5.71%. Chatham Inc. has an identical issue. It matures in 100 years, but it's callable in 5 years at $100. That means, if you pay $105 for the stock now, it may be redeemed in 5 years for only $100. You don't need a calculator to figure that Chatham preferred is not as good a deal as Madison preferred. In fact, the yield to the call date is only 5.15%. You'll need a financial calculator, or special tables, to compute the yield to maturity. But it'll be worth your effort.
Copyright 2003 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.--ISSN 1089-1536