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Tax Court Cases
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Fact Sheets
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IRS Written Determinations
July 2, 2009
News
The IRS may abate interest on a deficiency, but only if it is attributable in whole or in part to any unreasonable error or delay by an officer or employee of the IRS in performing a ministerial or managerial act. In Jack M. Chakoian II et ux. (T.C. Memo. 2009-151) the taxpayers claimed that the IRS abused his discretion in failing to abate interest under Section 6404(e) because (1) the taxpayers were induced to file an OIC (offer-in-compromise) upon the oral advice of one of IRS's call center employees and (2) IRS's decision to give the taxpayers' OIC low-priority status resulted in unreasonable delay. But the taxpayers were unable to specify the name of this employee or the date of their conversation. In any case, the Court noted, furnishing such oral advice does not constitute an erroneous performance of a managerial or ministerial act under Section 301.6404-2. The Court held, from its review of the record, the IRS was not dilatory in performing a managerial act. Although the decision to give the taxpayers' OIC low-priority status constituted a managerial act, the IRS's decision did not lead to an unreasonable error or delay under the facts of this case. The taxpayers did not allege, and the record did not show, that the IRS deviated from standard procedures in processing the taxpayers' OIC. The time the IRS took to process the taxpayers' OIC resulted from a backlog of OICs based on doubt as to liability, and the delay was not unreasonable under the circumstances. Accordingly, the taxpayers did not show that the IRS committed a managerial act that lead to an unreasonable error or delay and the Court did not overturn the IRS's decision not to abate interest.
Tip of the Day
Could the $3,000 capital loss limitation be increased? . . . You can only use capital losses to offset capital gains or up to $3,000 of ordinary income. Any unused losses can be carried forward indefinitely, but that's small comfort for many taxpayers who have large losses. Apparently there have been inquiries made to the IRS by some members of Congress regarding the limit. That could be idle questions or it may indicate some interest in raising the limit.
July 1, 2009
News
Revenue Procedure 2009-32 (IRB 2009-28) provides reliance criteria to private foundations and sponsoring organizations that maintain donor advised funds in determining whether a potential grantee is a supporting organization described in Section 509(a)(3).
Revenue Procedure 2009-33 (IRB 2009-29) provides guidance regarding the ability of corporations to elect not to claim the 50-percent depreciation deduction for certain property (extension property) placed in service before January 1, 2010, and instead increase their business credit limitation and AMT credit limitation.
If you win over the IRS, you may be able to recover your attorney and other fees. But the rules can be strict. In Michael Joseph Bent (T.C. Memo. 2009-146) the IRS examined the taxpayers returns for 6 tax years and, in July 2006, issued a Form 886A as to his liability for those years. Without submitting to the IRS a request for administrative costs and without receiving any IRS decision as to costs, the taxpayer filed a Tax Court petition for administrative costs for those years in March 2008 under Sec. 7430(f)(2), with an attachment that requested costs. In August 2008 the Court dismissed the petition for lack of jurisdiction because no decision denying the taxpayer an award of administrative costs had been made by the IRS. The taxpayer then orally requested the IRS to consider that petition as an application for costs, but the IRS took no action. In November 2008 he filed another Tax Court petition for administrative costs, alleging that his petition in docket No. 5622-08, which had been served on the IRS in March 2008, was a written request for costs, and that agency non-action for 6 months thereafter constituted a constructive agency decision under Sec. 301.7430-2(c)(6). The IRS moved to dismiss for lack of jurisdiction, on the ground that no agency decision within the meaning of Sec. 7430(f)(2) had been issued. The Court held that neither the taxpayer's March 2008 filing of his Tax Court petition nor his August 2008 oral request constituted the filing of an application for administrative costs under Sec. 7430(b)(4). The Court also held that in the absence of a written application for administrative costs, no constructive decision will be considered to have been issued under Sec. 301.7430-2(c)(6) as a result of the agency's non-action for 6 months. The Court further held that the IRS's motion to dismiss for lack of jurisdiction be granted and this case will be dismissed for lack of jurisdiction on the ground that the IRS has not issued any decision--either actual or constructive--denying the taxpayer's request for administrative costs that would confer jurisdiction on the Court under Sec. 7430(f)(2). Finally, the Court held in the alternative, if the taxpayer's March 2008 petition in docket No. 5622-08 is treated as a request for administrative costs, it was filed more than 90 days after the IRS's final decision as to the determination of the tax, so that the application was untimely and recovery of costs is barred under Sec. 7430(b)(4).
Before you give testimony, be sure the IRS can't find anything to contradict it. In Lee Michael Lawson (T.C. Memo. 2009-147) the taxpayer had given a deposition as the plaintiff in another case in state court. That testimony contradicted the taxpayer's testimony in his tax case. The Court found the deposition testimony to be relevant, nonhearsay testimony.
Tip of the Day
Look for alternative financing . . . Getting a bank loan in the current environment is difficult for most small businesses. But you may have other options. If you're financing equipment, chances are the manufacturer or dealer will have a lease deal available. But the effective interest rate may be much higher than you'd like. You might try a private equity firm. They might be more open to less than traditional deals, but they'll still go through your financials, etc. If you're looking for amounts under $3 million, even a bank may be interested, but you'll have to have good financials.
June 30, 2009
News
You can get a deduction for the fair market value of a conservation easement. Doing the paperwork is the easy part. Getting a valuation that will satisfy the IRS is the hard part. In Kiva Dunes Conservation LLC et al. (T.C. Memo. 2009-145) the taxpayer owned a golf course and placed a perpetual conservation easement on the course and donated the easement to the North American Land Trust. Under circumstances where there is a substantial record of sales of easements comparable to a donated easement, the fair market value of the donated easement is based on the sale prices of those comparable easements. Where, as in the instant case, there is no established market for similar conservation easements and no record exists of sales of such easements, the regulations provide a method to determine fair market value:
If no substantial record of market-place sales is available to use as a meaningful or valid comparison, as a general rule (but not necessarily in all cases) the fair market value of a perpetual conservation restriction is equal to the difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after the granting of the restriction.
The Court looked at the appraisals and experience of both experts. The Court found the taxpayer's appraiser had decades of experience in the county where the property was located; the IRS's expert only time in the county was to perform the appraisal of the easement. The Court examined the appraisals in detail and found the IRS's appraisal contained significant errors in interpreting the facts and application of methods. The Court accepted much of the taxpayer's appraisal, adjusting it for some errors.
Tip of the Day
Pricing a new product . . . If you've got a product that's competing with an existing one, you've generally got to use the price of the established product(s) as a guide. If you can clearly demonstrate your product is better (works faster, costs less to use, etc.) you may be able to get a higher price. Careful. The reputation of the established product is important. It's tough to compete against a well-known name. But what if you've got an entirely new product? You might use the closest existing product as a guide. For example, you've designed outdoor garden lights powered by the wind. While you might get some sales at high prices from customers interested in the novelty, but for significant sales you'll have to price it at something close to what similar solar powered lights sell for. If your business depends heavily on the pricing decision, get good advance from several sources.
June 29, 2009
News
Victims of recent wildfires in Oklahoma may qualify for tax relief from the IRS. Following wildfires on April 9, 2009, the President declared Carter, Cleveland, Grady, Lincoln, McClain, Murray, Oklahoma, Payne and Stephens counties a federal disaster area qualifying for individual assistance. As a result, the IRS is postponing until June 8, 2009, certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts otherwise due between April 9, 2009, and June 8, 2009. In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after April 9, 2009, and on or before April 24, 2009, as long as the deposits were made by April 24, 2009.
Victims of recent severe storms, tornadoes, and flooding in Missouri may qualify for tax relief from the IRS. Following severe storms, tornadoes, and flooding on May 8, 2009, the President declared Adair, Barry, Barton, Bollinger, Cape Girardeau, Christian, Dade, Dallas, Dent, Douglas, Greene, Howell, Iron, Jasper, Jefferson, Laclede, Lawrence, Madison, Newton, Ozark, Polk, Reynolds, Ripley, St. Francois, Shannon, Texas, Washington and Webster counties a federal disaster area qualifying for individual assistance. As a result, the IRS is postponing until July 7, 2009, certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts otherwise due between May 8, 2009, and July 7, 2009. In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after May 8, 2009, and on or before May 25, 2009, as long as the deposits were made by May 25, 2009.
Victims of recent severe storms, tornadoes, flooding, and straight line winds in Alabama may qualify for tax relief from the IRS. Following severe storms, flooding, tornadoes, and straight-line winds on May 6, 2009, the President declared Autauga, Elmore and Montgomery counties a federal disaster area qualifying for individual assistance. As a result, the IRS is postponing until July 6, 2009, certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts otherwise due between May 6, 2009, and July 6, 2009. In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after May 6, 2009, and on or before May 21, 2009, as long as the deposits were made by May 21, 2009.
For additional information on the above (and other) disasters, go to the IRS Web page at www.irs.gov/newsroom/article/0,,id=108362,00.html.
Tip of the Day
Success doesn't always translate . . . We know of one owner that created a thriving catalog business (in fact, the catalog became somewhat famous). While very profitable, he hit a wall when he ran out of customers that would buy this particular merchandise. Reasoning there was only one way to expand, he opened a number of retail stores, all within a short period. What sold so well to the limited number of customers in the catalog, attracted few shoppers in the stores. In fact, the store traffic could only be called embarrassing. Don't rely on intuition. If at all possible, do a test before committing so much in resources that failure of the new venture will jeopardize the entire business. (Both the catalog and the retail business is gone.)
June 26, 2009
News
The IRS has issued an updated list of frequently asked questions to the fact sheet issued on May 6, 2009 addressing the voluntary disclosure of offshore accounts. The revision updates the definition of a U.S. person to conform that in Announcement 2009-51 and includes an additional 21 questions and answers to the original list.
You've got to have more than canceled checks and financial statements to sustain your deductions. In Eileen G. Akers (2009-1 USTC 50,372; U.S. Court of Appeals, 2nd Circuit) the Court upheld the Tax Court's denial of deductions for lack of substantiation. Financial statements submitted in support of the taxpayer's deductions were incomplete and contained unexplained redactions and alterations.
Tip of the Day
Sale of easement . . . It's not unusual for a taxpayer to sell an easement in land he or she owns. How is the sale treated? If you sell a perpetual easement, the transaction is generally treated as a sale of property that qualifies for capital gain or loss. On the other hand, if you only sell or grant a limited easement, it's not considered a sale of property. Rather, the amount received reduces your basis. Any amount that exceeds your basis in the property results in taxable gain. But, depending on the facts, it can get more complex. If, after granting the easement, you really have only bare legal title, the transaction will probably be considered a sale. That can occur where you still own the land but are essentially restricted from any significant use. Check with your tax advisor. You may be able to structure the deal to gain a tax advantage.
June 25, 2009
News
Capital gain or ordinary income? For individual taxpayers, rarely is there much of a question. Hold the property for more than a year--it's a long-term capital gain. But if you're a real estate agent or a developer, the IRS may argue that you held the property for sale to customers in the ordinary course of business and any gain is ordinary income. In Bruce A. Rice et ux. (T.C. Memo. 2009-142) the taxpayers purchased some 14 acres of land on which to build their dream home. The land was offered only as a single parcel. The taxpayers built a substantial home on the property, but not needing or wanting all the acreage, sold a number of lots over several years. The Tax Court held the property was held for investment and any gains on the sale of the lots were capital in nature.
If you're married, when you initially file your return you can file as married, filing joint or as married, filing separately. But you cannot change your filing status on an amended return. In James A. Haigh (T.C. Memo. 2009-140) the taxpayer requested innocent spouse relief and tried to change his filing status to married, separate on an amended return. However, a joint return for a taxable year that is signed under duress is not a joint return for that year for purposes of Section 6013, and the spouse who signed the joint return under duress will not be held jointly and severally liable for any deficiency in tax that the IRS determines. In order to prove that a taxpayer signed a joint return under duress, the taxpayer must show (1) that the taxpayer was unable to resist the demands of the taxpayer's spouse to sign the joint return and (2) that the taxpayer would not have signed the joint return absent the constraint that the taxpayer's spouse applied to the taxpayer's will. The Court found the taxpayer failed to carry his burden of establishing that he signed the return under duress.
Tip of the Day
Keep your story straight . . . Whether it's a tax case, a business dispute, etc. be careful what you claim. In one case the taxpayer claimed his business records were stolen when his car was broken into. But the police report showed only two tennis rackets and a watch were stolen. Worse yet, the fact that tennis rackets were in his car made the judge suspicious of his claims of physical incapacity. In another case the taxpayer presented a notepad claiming to be a contemporaneous tip log. The IRS presented a witness from the company who manufactured the pad who testified that the pad wasn't made until three years after the date the taxpayer claimed the entries. In yet another case, the court looked at both the taxpayer's car log and other travel documentation. The taxpayer's credibility was destroyed when the car log claimed he drove from Sacramento to Reno on the same day airline tickets said he flew there. You can generally avoid these problems with contemporaneous, accurate recordkeeping.
June 24, 2009
News
Revenue Ruling 2009-19 (IRB 2009-28) holds that Pay-for-Performance Success Payments that benefit a homeowner under the United States Government’s Home Affordable Modification Program are excludable from the homeowner’s income under the general welfare exclusion. This program helps homeowners who have defaulted, or are at risk of default, on their mortgages. A homeowner that makes timely payments on a modified loan is eligible to have incentive payments made to lenders/investors that reduce the principal balance on the loan.
Revenue Ruling 2009-18 (IRB 2009-27) notes that a number of guidance documents had become outdated due to numerous intervening statutory revisions enacted in section 403(b). Final regulations under Sections 1.403(b)-1 thru 11 have been issued. Since these regulations include and modify much of the IRS guidance relating to section 403(b) issued between 1964 and 2004, the guidance documents listed in the revenue ruling are obsoleted or superseded in their entirety, with one partial exception (Notice 89-23).
In Judith Walthers (T.C. Memo. 2009-139) the IRS did not issue a notice of determination in respect of the taxpayer's outstanding tax liabilities for 1998, 2001, and 2002 because the taxpayer did not request a hearing under Section 6330. The IRS, however, must first issue a final notice of intent to levy and send it to the taxpayer at the taxpayer's last known address before a hearing is held and the notice of determination is issued. As a result, the Court noted it did not have jurisdiction to hear the taxpayer's case, and the only issue to be decided was the proper basis for dismissal. The IRS argued that the Court lacked jurisdiction because the taxpayer failed to request a hearing under Section 6330; dismissal on that ground would allow the IRS to levy upon the taxpayer's property to satisfy her Federal tax liabilities. The taxpayer argued that she never received a valid final notice of intent to levy; dismissal on that ground would in effect invalidate the notice of levy. The IRS, however, must prove by "direct" evidence the date and fact of mailing the notice to the taxpayer. The IRS's presentation of a date-stamped copy of the notice and a file memorandum by an Appeals officer noting that the notice was returned undeliverable has been held to be insufficient to prove statutory certified mailing requirements. With the proper foundation, computer records may be evidence of correspondence. The IRS presented Form 4340 as proof of mailing, however, as has been observed by another court, Form 4340 does not disclose the address to which the letter was sent or that it was sent by certified mail. The Court held the IRS had not shown that it mailed the notice to the taxpayer's last known address by certified mail.
Tip of the Day
Discontinued items . . . In order to cut expenses, many manufacturers are eliminating unprofitable or low-volume products. Similarly, some service companies are either eliminating unprofitable services, or increasing prices. Check to make sure an item or service you need isn't destined to be discontinued. Sometimes it's obvious--supplies for your machine have been harder to get and there's only one distributor that handles them now. Or you have a machine that's ancient and you know from industry experience it's little used. Or you know the company is losing money on every item it sells. Sometimes the loss is easy to overcome--there are similar parts available and a small design change is all that's needed. But sometimes the part or service is critical to your business and a substitute is hard to find. The solution may not be simple, but the more warning you have, the better chance you have of avoiding a catastrophe. Your options will depend on the situation. We know of one small business that purchased three old typesetting machines for their scrap value plus shipping. They stripped the machines for parts and managed to get six more years out of their old machine. That was long enough to see the quality of computerized typesetting increase significantly as the prices dropped substantially.
June 23, 2009
News
The IRS has just reported the Applicable Federal Rate (AFR) for July, 2009 along with the blended annual rate for 2009. The short-term rate is 0.82 percent and the blended rate for 2009 is also 0.82 percent. The AFR for determining the present value of an annuity, an interest for life or a term of year, or a remainder or reversion interest under Sec. 7520 is 3.4 percent, up from 2.8% for June. For the complete text of the revenue ruling, go to www.irs.gov/app/picklist/list/federalRates.html.
In Martin A. Kapp (2009-1 USTC 50,376; U.S. Court of Appeals, 9th Circuit) a CPA was permanently enjoined from preparing tax returns claiming that mariners could deduct meal expenses while working aboard ship, despite the fact that no meal expenses were incurred. The Court found that his position with respect to the tax deduction was unreasonable and not supported by substantial authority. The Court rejected his argument that he was not subject to a penalty because he acted in good faith by seeking the advice of numerous government officials and attorneys, in part because he was not entitled to rely on their advice.
The spouse requesting innocent spouse relief normally bears the burden of proof in Section 6015 cases. However, Section 6015(c) specifically provides that the IRS bears the burden of proving that a spouse electing relief had actual knowledge at the time of signing the return of any item giving rise to the deficiency in joint tax. In Steven M. McDaniel et al. (T.C. Memo. 2009-137) the taxpayer and his former spouse filed joint tax returns, but kept separate checking accounts and generally kept their finances separate. The spouse had business and claimed related deductions, a substantial portion of which were disallowed. At both parts of the trial the IRS conducted minimal cross-examination and presented no evidence to show that the taxpayer had actual knowledge of the facts underlying the disallowed deductions. Petitioner disclaimed any actual knowledge of the facts that caused those deductions to be disallowed. The Court found no evidence that the taxpayer had actual knowledge of the facts causing the IRS to disallow his ex-wife's business expense deductions. As a result the Court granted the taxpayer relief from joint and several liability with respect to his ex-wife's disallowed business expense deductions. The Court found similarly with respect to charitable contributions and miscellaneous itemized deductions.
Tip of the Day
Reasonable cause for failure to file . . . There aren't many excuses for failure to file a return. The Tax Court has found reasonable cause where the taxpayer experiences an illness or incapacity that prevents the taxpayer from filing his or her tax return (Harris, T.C. Memo. 1969-49). There reasonable cause was found where the taxpayer's activities were severely restricted, and the taxpayer was in and out of hospitals because of various severe medical ailments including stroke, paralysis, heart attack, bladder trouble, and breast cancer. But you can't argue illness or other factors if you're continuing to carry on your business affairs despite the illness or incapacity. In one case the Tax Court did not find reasonable cause where the taxpayer's mother and daughter were both ill and the taxpayer frequently took them to see doctors, but the taxpayer also performed extensive services for his business.
June 22, 2009
News
Victims of recent flooding and ice jams in Alaska may qualify for tax relief from the IRS. Following flooding and ice jams on April 28, 2009, the President declared Alaska Gateway, Kuspuk, Yukon Flats and Yukon-Koyukuk regional educational attendance areas a federal disaster area qualifying for individual assistance. As a result, the IRS is postponing until June 29, 2009, certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts otherwise due between April 28, 2009, and June 29, 2009. In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after April 28, 2009, and on or before May 13, 2009, as long as the deposits were made by May 13, 2009. IRS computer systems automatically identify taxpayers located in the covered disaster area and apply automatic filing and payment relief. Affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request tax relief.
Tip of the Day
Disability payments-taxable or nontaxable? . . . Just because you receive payments related to an injury or disability doesn't mean the amounts are nontaxable. Disability benefits are generally taxable income if your employer paid for the policy or you paid with pretax dollars. If you paid the premiums with after tax dollars or the amount of the premiums were included as additional income on your W-2, disability benefits should be nontaxable. Amounts received through workmen's compensation are generally nontaxable. But benefits under a workmen's compensation claim must be for personal injury or sickness incurred in the course of employment. Some disability statutes for state and local employees are in the nature of workmen's compensation and the payments are excludable. But this exclusion does not apply to the amount received either to the extent that it is determined by reference to the employee's age or length of service, or the employee's prior contributions, even though the employee's retirement is occasioned by an occupational injury or sickness, or to the extent that it is in excess of the amount provided in the applicable workmen's compensation act. This can be a tricky area. Get good advice.
June 19, 2009
News
If you receive a settlement for an accident, malpractice claim, etc. that caused physical injury, the award is not taxable. (And emotional distress is not considered a physical injury.) An award received for any other reason is taxable. That's been the law for a number of years. In Laura Denise Seidel (2009-1 USTC 50,370; U.S. Court of Appeals, 9th Circuit) the Court upheld the Tax Court in finding an award the taxpayer received was fully taxable. The Court noted the payment was intended to compensate the taxpayer for emotional distress. The Court cited an earlier case that in analyzing a settlement agreement, the court looks to the express language of the agreement to determine whether it specifies the purpose of the compensation and, if there is no express language, the intent of the payor. The settlement agreement stated that ". . . acknowledges that she considers the payment of the check payable to her without withholdings to be compensation for personal injury (i.e. emotional distress) damages only". The Tax Court noted, the i.e. means "that is" which indicated the personal injury was emotional distress.
Tip of the Day
Employee discounts . . . They can be an attractive perk from a number of standpoints. First, they often cost the company very little. Second, done right they're not taxable to the employee. Third, there are often intangible benefits from providing an employee with company products. But there are some restrictions. Here are the basics:
There are other rules, and, of course, exceptions. Check with your tax advisor. If the discount doesn't qualify, you've got to include the amount as income to the employee and withhold income taxes and FICA.
June 18, 2009
News
In a statement, IRS Commissioner Doug Shulman said ". . . the Internal Revenue Service asked for comments on ways to simplify compliance with rules related to employer-provided cellular telephones. The current law, which has been on the books for many years, is burdensome, poorly understood by taxpayers, and difficult for the IRS to administer consistently. Some have incorrectly implied that the IRS is 'cracking down' on employee use of employer-provided cell phones. To the contrary, the IRS is attempting to simplify the rules and eliminate uncertainty for businesses and individuals. Although some of the proposed changes would add clarity, the current law will inevitably leave widespread confusion among employees and businesses. Therefore, Secretary Geithner and I ask that Congress act to make clear that there will be no tax consequence to employers or employees for personal use of work-related devices such as cell phones provided by employers. The passage of time, advances in technology, and the nature of communication in the modern workplace have rendered this law obsolete." (For additional information, see below, our June 9 News.)
In Alex Meruelo et ux. (132 T.C. NO. 18) the IRS issued the taxpayers a notice of deficiency (NOD) for 1999 that contained determinations related to an entity subject to the unified audit and litigation procedures of TEFRA. On their 1999 Federal income tax return, the taxpayers claimed a deduction for a $4,538,844 loss that reportedly passed through to them from a partnership they identified as M. M was actually the taxpayer-husband's single-member limited liability company (LLC) that was a disregarded entity for Federal tax purposes; the claimed loss actually stemmed from IV, a five-member (one of whom was the taxpayer) LLC subject to TEFRA. IV reported on its 1999 return that it incurred a loss and that $4,538,844 of the loss passed through to M. IV's return did not indicate that M was a single-member LLC, that M was a disregarded entity, or that the taxpayer (rather than M) was actually IV's member. The taxpayer did not file a return for M for 1999, and the IRS did not audit (or make any adjustments to) IV's 1999 return during the 3-year period of limitations for assessing tax attributable to partnership and affected items from IV's 1999 taxable year. The IRS issued the NOD to the taxpayers shortly before the expiration of the 3-year period of limitations for assessing tax as to the taxpayers' 1999 taxable year, which coincided with the expiration of the 3-year period of limitations for IV's 1999 taxable year. The NOD reflected: (1) the taxpayers' reporting that M was a partnership and (2) the IRS's determination that Secs. 465 and 704(d) precluded the taxpayers deducting any of the loss and that they were liable for an accuracy-related penalty under Sec. 6662. The IRS learned during this case that M was not a partnership but was a disregarded entity. The IRS also learned that the taxpayers' $4,538,844 claimed loss was related to IV and related the taxpayers' claimed loss to an ongoing grand jury investigation into tax shelters. Afterwards, the IRS informed the Court that it may still determine that IV's 1999 return contained a false or fraudulent partnership item that would allow the IRS to assess tax related to the loss after the expiration of the 3-year period of limitations applicable to IV. The taxpayers moved the Court to dismiss the case for lack of jurisdiction, asserting that the IRS issued the NOD prematurely (i.e., before the completion of partnership-level proceedings as to IV) because the IRS neither issued a notice of final partnership administrative adjustment (FPAA) to IV for 1999 nor accepted IV's 1999 return as filed. The Tax Court held that the IRS did not issue the NOD prematurely because it issued the NOD to the taxpayers during their 3-year period of limitations, without issuing an FPAA to IV during the 3-year period of limitations applicable to IV. The Court further held that the IRS's determinations under Secs. 465, 704(d), and 6662 implicate affected items that require determinations at the partner level, and the Court has jurisdiction to decide this case.
Tip of the Day
Expectation of reimbursement can preclude deduction. . . . Clearly, if you incur business expenses that are reimbursed by another party, the expenses aren't deductible. But even an expectation of reimbursement, rather than a fixed and absolute right of reimbursement, has been held to be sufficient to preclude a deduction under Section 162 (business expenses). For example, Rev. Rul. 80-348, holds that travel expenses that otherwise would be allowable as a deduction under Section 162(a) may not be deducted if there is an expectation of reimbursement, even if the reimbursement is not received until a later year.
June 17, 2009
News
Rev. Proc. 2009-31 provides the procedures by which a taxpayer may (1) obtain the consent of the IRS to treat some or all intercompany transactions on a separate entity basis under Sec. 1.1502-13(e)(3), (2) revoke such consent, or have such consent revoked by the IRS, and (3) obtain the IRS's consent to change from separate entity reporting to single entity reporting where a valid consent from the Service to report intercompany transactions on a separate entity basis was not previously obtained. This revenue procedure modifies and supersedes Rev. Proc. 97-49.
In Robert Judge (T.C. Memo. 2009-135) the taxpayer argued that the settlement officer abused his discretion because he refused to grant a brief extension of time for petitioner to submit a revised Form 433-A to correct his income information. Because the taxpayer did not dispute the underlying tax liabilities, the Court reviewed the IRS's determination sustaining the collection action for abuse of discretion. (An abuse of discretion occurs when the Appeals officer's determination was arbitrary, capricious, or without sound basis in fact or law.) The Court noted that it is not an abuse of discretion for the IRS to sustain a collection action if the taxpayer fails to submit financial information. The Court noted the taxpayer provided a Form 433-A some time before the hearing, but the IRS misplaced it. The Court found a short delay in the submission of a second form did not justify sustaining the levy without granting a brief extension for the taxpayer to revise his income information. Moreover, the record showed the settlement officer did not make any determination based on the financial information provided. The Court also noted the taxpayer had cooperated with the Appeals Office. The Court held the IRS abused its discretion and denied the taxpayer his right to a fair hearing.
Tip of the Day
Keep it simple . . . There's no question about it, the more complicated things get, the more chances for things to go wrong. In some situations, the product, legal document, etc. has to be complicated. Often, there's little you can do about it. It's unlikely a TV with just an on-off switch, volume control, and channel selector would sell in today's market. But don't add complexity simply because you can. We know of one manufacturer that added a feature to his product because it was easy and cheap to do. Turned out the feature's failure precipitated a safety recall of the product. We've seen legal documents with superfluous clauses that generated litigation.
June 16, 2009
News
Documentation and recordkeeping are essential if you want your expenses to be deductible. That not only means generating the original records, but safeguarding them. In Paul Rudnick (T.C. Memo. 2009-133) the taxpayer's business and records were located in Vietnam and were seized in a raid by local authorities. The taxpayer generated a computer spreadsheet showing various expenses for a 12-month period. The IRS objected to a spreadsheet entered as an exhibit on grounds of authenticity, best evidence, and hearsay and because it was prepared in anticipation of litigation. The IRS contended that it was an improper summary, chart, or calculation under rule 1006 of the Federal Rules of Evidence because the underlying documents used to prepare the spreadsheet were not made available to the IRS and the taxpayer provided no testimony regarding the preparation of the spreadsheet. (Rule 1006 of the Federal Rules of Evidence provides that the contents of voluminous writings that cannot conveniently be examined in court may be presented in the form of a chart, summary, or calculation. It also provides that the originals or duplicates of the summarized writings must be made available for examination or copying, or both, by other parties at a reasonable time and place.) The exhibit did not show the year to which the spreadsheet related or who prepared the spreadsheet. The taxpayer did not present any credible testimony about the source of the amounts shown in the spreadsheet or what the expenses represented. Because the taxpayer did not produce the underlying documentation that the exhibit purportedly summarized as required by rule 1006 of the Federal Rules of Evidence, the Court concluded the exhibit was inadmissible. The Court disallowed unreimbursed employee expenses and some expenses that were evidenced by invoices which bore the name of a similar, related entity. Other expenses were denied for lack of receipts, canceled checks or other documentation.
In Cox Enterprises Inc., et al. (T.C. Memo. 2009-134) C and A were either the sole or controlling trustees of three trusts (the shareholder trusts) whose corpora, together, consisted exclusively of 98 percent of the taxpayer's stock. C and A were the income beneficiaries of each trust for life, the remainder (corpus) to be divided among their lineal descendants upon the death of the survivor. In 1992, the taxpayer tried to sell two TV stations but was able to sell only one. For valid business reasons, the taxpayer decided to operate the retained station, KTVU (TV), in partnership with two family partnerships whose members were C, A, their children, and entities they controlled. In 1993, to that end, KTVU, Inc., a wholly owned second-tier subsidiary of P that owned and operated KTVU (TV), contributed the KTVU (TV) station assets to the newly formed KTVU Partnership in exchange for a majority partnership interest. The two family partnerships contributed cash in exchange for their minority interests. In 1996, the family partnerships made additional cash contributions to correct an inadvertent shortfall identified by an independent consulting firm. The IRS alleged that, because KTVU, Inc.'s partnership interest in KTVU Partnership was worth $60.5 million less than the station assets it contributed to KTVU Partnership, KTVU, Inc., gratuitously transferred valuable partnership interests to the family partnerships. The IRS argued that, because of (1) the identity of interests between the beneficiaries of the shareholder trusts and the members of the family partnerships and (2) the effective control by C and A over the corporate actions of the taxpayer and its subsidiary, KTVU, Inc., that transfer was made for the benefit of the shareholder trusts, resulting in a constructive dividend distribution of appreciated property by the taxpayer to the shareholder trusts taxable under sec. 311(b). The Tax Court held that because the undisputed facts establish that it was not the primary purpose of the assumed gratuitous transfer of partnership interests to the family partnerships to provide an economic benefit to them and, derivatively, to the shareholder trusts, that assumed transfer did not constitute a constructive dividend from the taxpayer to the shareholder trusts resulting in taxable gain.
Tip of the Day
Cancellation of debt income . . . Generally, if a debtor cancels a debt you owe, the amount forgiven is taxable income. There are exceptions. One of the most common ones is insolvency. Any debt forgiven is not income, up to the amount by which you are insolvent. You're considered insolvent if the amount of your outstanding debts exceeds the fair market value of your assets. If you're claiming that exception, you've got to be able to show the fair market value of the assets. That could mean appraisals and a complete list of all your assets.
June 15, 2009
News
The healthcare reform bill could be released in draft form as early as this week with markup occurring a little over a week from now. The bill would probably reduce the tax benefits of employer provided health care. The three options discussed include a cap on the exclusion based on the value of the Federal Employees Health Benefit Plan and indexing it to the growth in medical costs, a second option is linking that cap to an adjusted gross income limit with cutoffs of $100,000 ($200,000 for joint filers), and a third option would be to limit the exclusion to half the premium paid by the employer.
Notice 2009-54 (IRB 2009-26) sets forth a process that allows manufacturers to certify to the IRS that a particular vehicle meets the requirements of Sec. 30D . Taxpayers purchasing such vehicles can rely on the domestic manufacturer’s (or, in the case of a foreign manufacturer, its domestic distributor’s) certification that both a particular make, model, and model year of vehicle qualifies as a plug-in electric drive motor vehicle under Sec. 30D, and the amount of the credit allowable with respect to the vehicle.
Section 7525(a)(1) provides a limited privilege, equivalent to the attorney-client privilege, to communications regarding tax advice between a taxpayer and any federally authorized tax practitioner (FATP). The privilege does not apply to written communication in connection with the promotion of the direct or indirect participation of a corporation in any tax shelter. In Countryside Limited Partnership et al. (132 T.C. No. 17) the IRS moved to compel production of documents. The taxpayers objected, claiming that the documents were protected from disclosure by, among other privileges, the so-called FATP privilege described in Sec. 7525(a). The Tax Court determined that the FATP privilege applies, subject to the IRS's right to show the privilege does not apply. To do that, the IRS must show that the requested documents are written communications in connection with the promotion of corporate tax shelters and, thus, that the exception in Sec. 7525(b) to the FATP privilege applies. The Court held the taxpayers had the burden of proving the preliminary facts necessary to establish the FATP privilege; the IRS had the burden of proving the preliminary facts necessary to establish the exception. The Court also held the meeting notes in question not communicated to anyone are not a written communication that can satisfy that element of the Sec. 7525(b) exception. Finally, the Court held the written minutes in question are not within the Sec. 7525(b) exception because the IRS failed to show that the FATP promoted a corporate tax shelter.
Tip of the Day
Is the recession over? . . . There are some hopeful signs. Job losses are slowing, consumer confidence is up, etc. But there are also negatives. Mortgage rates are up and foreclosures are high. Some professionals believe house prices won't be rising until the end of 2010. While on a broad overview it looks like it won't get much worse from here, it also could be some time before we truly recover. The housing market could remain in the doldrums for some time and there's a big question as to whether consumers will spend as freely as they once did. Both are important to any recovery. How well your business will do could depend heavily on what industry your in.
June 12, 2009
News
You can only deduct medical expenses for which you are liable and which you paid. In Christina Marie Thompson McGrath (T.C. Memo. 2009-126) the taxpayer's father paid for the taxpayer's medical procedure. The taxpayer deducted the payment, less the 7.5 percent threshold. The Court sided with the IRS in disallowing the deduction because the father, not the taxpayer, made the payment.
When you receive actual payment may not determine when the income is taxable; when you have control of the income is. In John Oliver Green (2009-1 USTC 50,355; U.S. Court of Appeals, 5th Circuit) the Court of Appeals upheld the Tax Court in finding that the taxpayer had income from disability payments in the year he could instruct the payer to pay his former wife.
Tip of the Day
Consistent treatment important . . . Once transactions stray from the norm, you've got to be particularly careful. For example, the IRS is unlikely to question your monthly rent expense. They may ask to see the lease and examine a canceled check or two. But if your business is renting property from you, or a related party, chances are the Service will dig deeper. Make sure you have a lease and that the business deducts the rent and you (as the landlord) report it as income. In one case the tenant made improvements to the property in lieu of paying rent. The taxpayer was able to show that the transaction had economic substance and the transfer of the improvements to the landlord was not illusory. The lease clearly stated the obligations of both sides and that there was a give and take and the transaction was at arm's length. While there was some departure from standard practice, the reasons were documented and had economic substance. Finally, both the tenant and the landlord treated the accounting for all items consistently.
June 11, 2009
News
The IRS has announced (IR-2009-60) that a tax break for the purchase of new motor vehicles is available in states that do not have a state sales tax. Under the American Recovery and Reinvestment Act of 2009, taxpayers who buy a new motor vehicle this year are entitled to deduct state or local sales or excise taxes paid on the purchase. The IRS has determined that purchases made in states without a sales tax – such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon – can also qualify for the deduction. Taxpayers who purchase a new motor vehicle in states that do not have state sales taxes are entitled to deduct other fees or taxes imposed by the state or local government. The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per unit fee. According to the IRS, Congress intended for these fees or taxes to qualify for this special tax deduction. To qualify for this deduction, the vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010. Taxpayers can claim this special deduction only on their 2009 tax returns to be filed next year. The deduction is limited to the fees or taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle. The deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers. The deduction is available regardless of whether taxpayers itemize deductions on their returns.
The IRS has issued final and temporary regulations (T.D. 9453) under Section 7874 concerning the determination of whether a foreign corporation shall be treated as a surrogate foreign corporation. The temporary regulations primarily affect domestic corporations or partnerships (and certain parties related thereto), and certain foreign corporations that acquire substantially all of the properties of such domestic corporations or partnerships.
The IRS can hold any responsible person liable for undeposited employment taxes. That can include anyone who can sign company checks. In In re Jonathan Hess Palmer (2009-1 USTC 50,358; U.S. Bankruptcy Court, Dist. Minn.) the Court found the former deputy director of a non-profit school was not a responsible person. The Court noted that although the individual could sign checks, he was not authorized to make independent judgments with regard to business decision and had very limited discretion to write checks for some minimal expenses. He was authorized to sign checks merely as a convenience. If he had exceeded his authority and refused to pay bills as instructed or paid the IRS without permission, his employment would have been jeopardized.
Generally, the IRS is presumed correct and the burden of proof is on the taxpayer to show the IRS is wrong. You can switch the burden of proof to the IRS if (1) you can provide credible evidence to support your deductions, (2) you have complied with the requirements to substantiate your deductions and (3) you have maintained all records required by the Tax Code and cooperated with the IRS. In In re Philip Jay Berg (2009-1 USTC 50,354; U.S. Bankruptcy Court, East. Dist. Pa.) the Court found the taxpayer failed to overcome the IRS's presumption of correctness because he fulfilled none of the requirements for switching the burden of proof.
Tip of the Day
Treat your vendors right . . . While it may not cost you in the short run to take a discount when it doesn't apply, pay late, claim the shipment was short, etc. it may come back to haunt you later. What if your supplier goes out of business? Who would you turn to? Or what if they were acquired by a much larger firm? You might find your source of supply gone or have to deal with a large corporation that may raise prices because it's the only game in town. Worse yet, they may discontinue a product you need. There's nothing wrong with hard-nosed negotiating, but you may be as dependent on your supplier or service provider as he is on you.
June 10, 2009
News
You may be able to pay your outstanding tax debt with an installment agreement, but you've got to meet certain requirements. In James H. Kelso (T.C. Memo. 2009-125) the IRS Appeals officer reviewed the taxpayer's submitted financial information and determined that an installment agreement was not appropriate. The Tax Court received as exhibits the financial information presented to the IRS and found that the Appeals officer could have reasonably concluded that petitioner receives sufficient income to satisfy the tax liabilities without resorting to a partial payment installment agreement of $750 per month. The taxpayer's statement of income for his dental business for 2006 indicated that he had an average net profit of $10,205 per month. His 2007 return indicated that he had an average net profit of $11,373 per month. The medical information the taxpayer submitted did not indicate that his future earning potential would be drastically reduced as a result of his health problems. The Court concluded that the IRS's refusal to enter into an installment agreement was not an abuse of discretion.
In William R. Bass, Betty O. Bass (2009-1 USTC 50,322; U.S. Court of Appeals, 11th Circuit) the Appeals Court upheld the Tax Court in finding the taxpayers could not deduct their investment in a jojoba farm tax shelter partnership because it was a capital expenditure and not a business expense. The Court also affirmed the Tax Court's holding the taxpayers liable for the negligence and substantial understatement of income penalties. The taxpayer failed to seek expert advice before investing in the partnership. The Court disregarded the taxpayer's experience as an accountant as well as the fact that he grew up on a farm and his experience with investments.
Tip of the Day
Buy high, sell low? . . . That's what often happens when one business acquires another. There are probably more losses on acquisitions that gains. We're not sure why, but the consequences can be catastrophic. One retailer bought another in the same line for some $500 million several years ago. They're now selling the catalog retailer for $75 million. While that may be painful, we don't know if the acquisition cost them in losses over the years. In another acquisition, a venture capital group bought a high-tech company that had problems for years. They paid $400 million and sold the business three years later for $25 million after incurring some $150 million in losses. Some very smart companies have made some very costly mistakes. Before signing an agreement in principle, get good advice and don't let your judgment be clouded by nonbusiness factors.
June 9, 2009
News
While most business owners put their cell phones on the business and fully deduct the expense, even if a large portion of the use is personal, cell phones are considered listed property and, as such, require stricter documentation to be deductible and any personal use is nondeductible. Under current rules, a taxpayer would have to show the business purpose of every phone call. In Notice 2009-46 (IRB 2009-23) the IRS has proposed three alternative methods that would be simpler to implement. The first is the minimal personal use method that would allow all the usage to be considered business if no more than a minimal amount is personal. The second method would provide a safe harbor that would treat a certain amount of each employee's use of an employer provided cell phone as business. The IRS is proposes a business use percentage of 75 percent. The third method would allow the use of statistical sampling to measure personal use. The IRS is requesting public comments on these proposals.
You may be able to enter into a partial payment installment agreement for some unpaid taxes, but you've got to meet the IRS requirements. In TGI Enterprises Inc. (T.C. Memo. 2009-123) the taxpayer failed to deposit its payroll taxes for various quarters. The taxpayer requested a Sec. 6330 hearing and a desire for a partial payment installment agreement. The IRS requested financial information and that the taxpayer agree to certain prepayment requirements. The taxpayer did not provide the financial information nor did it agree to the payment requirements. The Tax Court held the IRS did not abuse its discretion in denying the taxpayer's partial payment installment request.
Want to claim to be exempt from withholding on your paycheck? While being exempt from income tax withholding is possible, few people actually are. In Gary C. Lizalek et al. (T.C. Memo. 2009-122) the taxpayer filed a W-4 claiming to be exempt. The taxpayer asserted that the wages were actually earned by his trust. The Tax Court found that the taxpayer filed a false W-4 when claiming to be exempt. The taxpayer had a tax liability for the prior year and expected to have a tax liability for the current year. The Court allowed the IRS imposed penalty of $500 under Sec. 6682.
Tip of the Day
Discovery can be devastating . . . If your business becomes involved in a legal dispute, the other party will most likely try to overwhelm you during the discovery process. They'll request any documents related (and sometimes unrelated) to the issue. That can be a very expensive process. Talk to your attorney as soon as you've been served.
June 8, 2009
News
Announcement 2009-51 (IRB 2009-25) temporarily suspends the reporting requirement with respect to foreign bank accounts (Form TD F 90.22-1 (Report of Foreign Bank and Financial Accounts)) due on June 30, 2009, for those persons who are not citizens, residents, or domestic entities. The revised Form TD F 90.22-1 (October 2008) was issued with a change in the instructions to the definition of “United States person.” The IRS has received a number of questions and comments from the public concerning the new filing requirement that may require additional guidance.
The IRS announced (IR-2009-58) that it will allow taxpayers to rely on the definition of a United States person as set forth in the prior instructions to the FBAR form when determining their filing requirement. This announcement affects those preparing for the coming June 30, 2009 deadline. The IRS took this action to reduce burden after concerns and questions were raised regarding the new instructions issued last year on who must file the revised Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, or FBAR). For this year, taxpayers and others can rely on the definition of a United States person included in the prior instruction: “United States Person The term “United States person” means (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust.” All other requirements of the current version of the FBAR form and instructions (revised in October 2008) are still in effect. The current version of the form must be used when filing an FBAR. This substitution affecting who must file the FBAR applies only to FBARs due on June 30, 2009. The IRS will be following up with additional guidance on the requirement to file for future years.
Notice 2009-52 (IRB 2009-25) provides a description of the procedures that taxpayers will be required to follow to make an irrevocable election to take the investment tax credit for energy property under Section 48 of the Code in lieu of the production tax credit under Section 45 of the Internal Revenue Code.
Tip of the Day
Original will necessary . . . In all the states we know of, you'll generally need the original will when you go to probate. You might be able to convince the court the copy is valid, but the time and cost to do so could be substantial. Many individuals leave their original will with the attorney who drafted it and keep a copy at home. But you might want to consider other options if the attorney is a sole practitioner, old, etc. He may pass the wills on to another attorney if he dies or sells the practice, but don't count on it. You should be more careful if you're moving to another state and could lose track of him or her. (By the way, you don't have to have that attorney probate the will.) A better approach is to put the will in a safe deposit box or very secure safe. Your heirs might need a court order to gain access to the safe deposit box, but your attorney should be able to secure that fairly quickly. Better still, some jurisdictions allow you to register the will with the court. And while a will is needed to begin the probate process, the delay is not likely to be critical. You should keep a copy in an easily accessible place, particularly if your will has burial instructions or other information that needs to be accessed quickly. Make sure the location of the original will is known.
June 5, 2009
News
Victims of recent severe storms, tornadoes, flooding, and mudslides in Kentucky may qualify for tax relief from the IRS. Following severe storms, flooding, tornadoes, and straight-line winds on May 3, 2009, the President declared Breathitt, Floyd, Owsley and Pike counties a federal disaster area qualifying for individual assistance. As a result, the IRS is postponing until July 2, 2009, certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts otherwise due between May 3, 2009, and July 2, 2009. In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after May 3, 2009, and on or before May 18, 2009, as long as the deposits were made by May 18, 2009. If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the Postponement Period. IRS computer systems automatically identify taxpayers located in the covered disaster area and apply automatic filing and payment relief. Affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request tax relief.
The IRS Commissioner announced (IR-2009-57) that by the end of 2009, he will propose a comprehensive set of recommendations to help the IRS better leverage the tax return preparer community with the twin goals of increasing taxpayer compliance and ensuring uniform and high ethical standards of conduct for tax preparers. Some of the potential recommendations could focus on a new model for the regulation of tax return preparers; service and outreach for return preparers; education and training of return preparers; and enforcement related to return preparer misconduct. The Commissioner will submit recommendations to the Treasury Secretary and the President by the end of the year. The first part of this groundbreaking effort will involve fact finding and receiving input from a large and diverse constituent community that includes those that are licensed by state and federal authorities--such as enrolled agents, lawyers and accountants--as well as unlicensed tax preparers and software vendors. The effort will also seek input and dialog with consumer groups and taxpayers. More information, including schedules and agendas for public meetings, will be posted on the “Tax Professionals” page on the IRS Web site and will be communicated to stakeholder groups.
In a notice of final partnership administrative adjustment (FPAA) issued to Tigers Eye Trading LLC et al. (T.C. Memo. 2009-121) regarding a transaction of the type the IRS determined in Notice 2000-44, is a "listed transaction" (son of BOSS), the IRS determined inter alia that the taxpayer was not a partnership, had no business purpose other than tax avoidance, lacked economic substance, and was an economic sham for Federal income tax purposes. In the FPAA the IRS determined that amounts reported on the 1999 partnership return for contributions, distributions, other deductions, and other losses were reduced to zero, that the taxpayer's partners' outside bases in their partnership interests were zero, and that accuracy-related penalties determined at the partnership level should be imposed at the partner level. The taxpayers sought to declare invalid Sec. 301.6221-1T(c) and (d), on the ground that it would prevent the taxpayers from raising in this partnership-level proceeding partner-level reasonable cause defenses to accuracy-related penalties applicable to any deficiency resulting from the FPAA adjustments to partnership items. The Tax Court held that following New Millennium Trading, LLC the temporary regulation is valid and potentially applicable in the case at hand, so that, should the Court sustain the IRS's determinations in the FPAA that transactions with the taxpayer should be disregarded and that all other requirements for application of the accuracy-related penalties have been satisfied, the taxpayer may not assert in this partnership-level proceeding any partner-level defenses to application of the penalties.
Tip of the Day
Picking the lowest cost equipment . . . While the concept has been around for years, it's only recently become a more important issue. Total cost of ownership (TCO) is what the equipment or output from the equipment will cost you over the life of the item. For example, the TCO on a laser printer is the cost to buy the printer, plus the supplies and maintenance over the equipment's life. A $250 laser printer with a low prints per month factor and high cost of supplies can make sense for a home office or in a low-volume application (the cost of the printer is so low you can use them to reduce time to get copies, etc.). In fact, they're probably a smarter choice. If a $250 printer breaks you simply toss it. If a $750 printer breaks it's a tougher decision. On the other hand, a networked printer shared among 5 heavy users has to be more substantial. Moreover, you're more concerned with the cost of supplies than with the cost of the unit. A 1/2 cent cost saving per print on a reasonably high volume unit could easily translate to $700 a year. Analyzing costs can itself be costly. Save that work for expensive units or if you're purchasing multiple pieces. And keep in mind you don't need a machine to do everything. It may make more sense to outsource unusual or high-volume jobs.
June 4, 2009
News
REG-119532-08 contains corrections to a notice of proposed rulemaking (REG-119532-08). The corrections relate to proposed regulations that provide guidance on the portion of trust property includible in the grantor’s gross estate if the grantor has retained the use of the property, the right to an annuity, unitrust, graduated retained interest, or other payment from such property for life, for any period not ascertainable without reference to the grantor’s death, or for a period that does not in fact end before the grantor’s death.
You must reports amounts as taxable income when you have constructively received them. Constructive receipt occurs when you in effective control of the asset, whether it be cash, stock, etc. In Michael J. and Cynthia T. Fletcher (2009-1 USTC 50,334; U.S. Court of Appeals, 7th Circuit) the Appeals court upheld a District Court ruling that the taxpayer had taxable income in the year she received proceeds from the sale of her partnership interest. The Court found that despite certain restrictions on the transfer of the stock received and the fact that the stock was in escrow, she was in constructive possession and received all market gain or loss from the moment the transaction closed. The fact that the stock was in an escrow account did not matter.
Normally, a three-year statute of limitations applies. If you underreport your income by more than 25 percent, that period is increased to 6 years. You don't have to pocket cash from the till to underreport your income. In Burton O. Benson, Elizabeth C. Benson (2009-1 USTC 50,323; U.S. Court of Appeals, 9th Circuit) the taxpayer had interests in a C and an S corporation. The C corporation made payments to the S corporation for royalties, rent, and engineering services. The Appeals Court sided with the Tax Court when it found the transactions were without economic substance. The Court noted where a corporation provides an economic benefit to a shareholder with no expectation of reimbursement, the benefit is a constructive dividend. In this case the constructive dividends were never reported by the shareholder as taxable income. The unreported dividends amount to more than 25 percent of the taxpayers' income and the Court held that triggered a six-year statute of limitations period. The Court also noted that the failure to report the dividends did not result from an overstatement of basis or other technical miscalculation, nor were the amounts account for elsewhere in the returns.
Tip of the Day
Investing in raw land? . . . It's often the riskiest real estate investment. Depending on the property, flipping it for a profit can take a very long time in a poor market. We've seen parcels on the market for years. If you intend to develop it by putting up an office building or shopping center, the risk may not be reduced, only shifted. You'll need permits, which can take time to get and require considerable effort. Obtaining financing, particularly in the current market, is difficult. You'll have better luck with financing and getting a good return if you pre-lease at least a portion of the property. That could mean lining up tenants or using a portion of it for your own business.
June 3, 2009
News
In Estate of Valeria M. Miller (T.C. Memo. 2009-119) the IRS determined a deficiency of some $1 million in the Federal estate tax of the decedent's estate. First, the Court had to decide whether the value of the gross estate included an amount for which the estate of the decedent's predeceased husband (Mr. Miller) claimed a marital deduction. The Court found that those amounts for which Mr. Miller's estate claimed a marital deduction were properly included in the value of decedent's gross estate. Second, the Court had to determine whether the estate was required to include in the gross estate the total value of assets transferred to decedent's family limited partnership in April 2002 and May 2003, or if those transfers qualify for a discount. The Court found the value of those securities transferred to decedent's family limited partnership in April 2002 qualifies for a discount, while the value of those assets transferred in May 2003 does not qualify for a discount.
In Khairy E. Aref (T.C. Memo. 2009-118) the IRS disallowed a number of deductions related to the taxpayer's business and claimed the taxpayer had unreported income. The Tax Court sided with the IRS with respect to disallowing a depreciation deduction (the taxpayer was unable to show what equipment was depreciated, what was paid for it, or even who owned it). Because the taxpayer kept no diary, log, etc. regarding the use of two vehicles, the Court sided with the IRS in disallowing the auto expenses. The taxpayer was able to substantiate wages with paid invoices (the business was not in the U.S.). The Tax Court used the Cohan rule and allowed the taxpayer a deduction for part of his telephone expense. Finally, the taxpayer was able to show that the he had received loan proceeds in excess of the unreported deposits.
Tip of the Day
Buying your business back? . . . It's not as unusual as you think. A small business owner sells to an individual or small group of owners who discover they can't manage the business, can't turn a profit, can't get along, etc. In some cases the seller has taken back a note that the buyers can't pay. In a sale to a larger business, the buyer finds the fit isn't what they imagined. Buying back the business can make sense because you're almost certain to be able to buy it for less then you sold it for, sometimes a fraction of the original selling price. But even if the price sounds irresistible, you've still got to analyze it like any business purchase. More than likely they've been important changes. Some of the employees may have left, customers may have gone elsewhere, the overall market may have changed, the buyers may have changed prices, products, quality, etc. How much the business has changed will depend on a number of factors. The first step is to look at the numbers. If possible, talk to employees who are with the firm and who you know from the old days. Determine what's different and why. Look at the market and how it's changed. If the business has deteriorated make sure you understand why and whether it can be fixed as well as the cost. That will affect both your decision to buy or not and the price. Be sure to make your decision objectively--don't let your old love for the business cloud your analysis.
June 2, 2009
News
Notice 2009-53 provides procedures that manufacturers may follow to certify property as qualified nonbusiness energy property under Sec. 25C, as well as guidance regarding the conditions under which taxpayers seeking to claim the Sec. 25C credit may rely on a manufacturer’s certification. This notice also includes transition rules to provide taxpayers with guidance concerning the interaction of the effective date and timing provisions of the Energy Policy Act, the Energy Improvement and Extension Act, and the American Recovery and Reinvestment Act.
The foreign earned income exclusion allows U.S citizens who work abroad to exclude some or all of their income from U.S. taxation. The IRS has issued a fact sheet discussing the exclusion as it applies to U.S. citizens who perform services in international airspace.
Victims of recent severe storms, flooding, tornadoes and straight-line winds in Florida may qualify for tax relief from the IRS. Following severe storms, flooding, tornadoes, and straight-line winds on May 17, 2009, the President declared Volusia county a federal disaster area qualifying for individual assistance. As a result, the IRS is postponing until July 16, 2009, certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts otherwise due between May 17, 2009, and July 16, 2009. In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after May 17, 2009, and on or before June 1, 2009, as long as the deposits were made by June 1, 2009. If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the Postponement Period. IRS computer systems automatically identify taxpayers located in the covered disaster area and apply automatic filing and payment relief. Affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request tax relief.
In limited situations, taxpayers filing joint Federal income tax returns may be relieved from joint and several liability pursuant to Section 6015. In Stephanie Renae Hardin (T.C. Memo 2009-115) the Tax Court weighed the factors for and against granting innocent spouse relief. Based upon the Tax Court's examination of the entire record, it found that the taxpayer failed to carry her burden of establishing that it would be inequitable to hold her liable for the deficiency that the IRS determined for the taxable year at issue. Thus, the taxpayer failed to carry her burden of establishing that she was entitled to relief under Section 6015.
Tip of the Day
Federal and state tax laws can differ . . . While many of the tax rules for state purposes conform to federal law, there can be important differences. That can really cause problems if an entity is labeled one way for federal purposes and another way for state purposes. In a letter ruling, the department of revenue for one state held that an entity was a partnership for state purposes, even though it was considered a corporation for federal tax purposes. While it's unusual, it can happen. Check with your tax advisor if you're getting tricky when setting up an entity. That's particularly true in the case of LLCs. Some of the rules are not that clear and some professionals may not be aware of all the rules.
June 1, 2009
News
In David H. Baral (T.C. Memo. 2009-113) the taxpayer timely filed his 2001 Federal income tax return reporting an income tax liability of $3,303. After a correction of a patent error on his return, the IRS determined his tax liability to be $1,076 and issued a refund based on that recalculated liability. Subsequently, the IRS discovered the taxpayer had unreported income, wholly unrelated to the prior adjustment, which resulted in a deficiency. The IRS determined the taxpayer's deficiency using the correct tax liability less the $1,076 of liability the taxpayer had already paid and assessed the deficiency with interest. The taxpayer sought an abatement of interest, arguing that because he initially reported an income tax liability of $3,303, the IRS should have taken that into consideration and should have charged interest only on the amount of the deficiency that exceeded the $3,303 that he had originally reported. The IRS denied the abatement request. The Tax Court held the IRS did not abuse its discretion in denying the taxpayer's abatement of interest request and requiring him to pay interest on his entire deficiency.
Tip of the Day
Inventory liquidation and building . . . You may see significant orders from customers. Is the recession over for you? Or is it just that customers are rebuilding inventories that have declined to crisis levels? And, while it's likely most companies are done liquidating their excess stocks, that may not be true in all cases. Make sure you understand why demand is increasing (or decreasing) before taking drastic action. You don't want to ramp up for sales that won't be there or reduce capacity if demand will be back soon.
Copyright 2009 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