Small Business Taxes & ManagementTM--Copyright 2017, A/N Group, Inc.
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May 25, 2017
NewsThere are both civil and criminal penalties for filing fraudulent tax returns and they're not mutually exclusive. In Leroy Muncy (T.C. Memo. 2017-83) the taxpayer participated in a tax-avoidance scheme to avoid paying tax on his earnings. He plead guilty in a criminal proceeding and was order to make restitution. The taxpayer contended that the IRS erred in determining deficiencies for the taxable years 2003 through 2005 because the deficiencies contravene his criminal plea agreement and judgment. Specifically, he contended that the District Court determined his tax liabilities for 2003 through 2005 and that the IRS is collaterally estopped from relitigating these amounts. The Court noted that although the District Court ordered specific restitution amounts for each of the tax years 2003 through 2005, the taxpayer's tax liabilities for each of these years were not an essential element of the Government's case and were not actually litigated. The Court went on to say the taxpayer's plea agreement expressly states that it “does not bar or compromise any civil or administrative claim pending or that may be made against the defendant, including but not limited to tax matters.” Therefore, the IRS was not collaterally estopped from determining deficiencies relating to tax years 2003 through 2005.
If you want the IRS to consider collection alternatives (e.g., installment agreement) you've got to provide the Service with relevant financial information. In Edward Daniel (T.C. Memo. 2017-82) the Tax Court found the taxpayer failed to provide the requested financial information. The Court noted that generally, it is not an abuse of discretion for the settlement officer to deny a taxpayer's request for a collection alternative when the taxpayer does not provide collection information requested by the settlement officer. That was the situation in this case. The Court ruled that the proposed collection action was sustained.
Tip of the DayRecordkeeping for capital losses . . . You can use capital losses to offset capital gains or up to $3,000 in ordinary income. Any unused amounts can be carried forward indefinitely. When the market has turned sour for an extended period taxpayers may have capital loss carryforwards for a number of years. You've got to be able to substiate the losses. At a bare minimum you'll need your return for the year the loss arose and all intervening years to show the loss wasn't fully used. That's one reason to keep all your old tax returns. May 24, 2017
NewsYou can't double dip on a tax benefit. In Xing F. Wang and Kathleen P. Lee (T.C. Memo. 2017-81) the taxpayers claimed business deductions for expenditures incurred in research while receiving cash grants through Section 48D, Qualifying Therapeutic Discovery Project Credit. The Court noted the program prohibited participating taxpayers from deducting otherwise allowable qualified investment expenses to the extent those expenses were reimbursed through the program also noted the law explicitly disqualified certain expenses, notably money paid to CEOs, or to individuals acting in such a capacity. The Court noted the law with respect to a double deduction was clear and the petitioners received a letter notifying them of their statutory obligations. The Court held the taxpayers' 2009 and 2010 allowable Schedule C expenses reimbursed by the grant must be reduced.
You may get relief from the joint liability associated with a return filed with your spouse if you meet certain requirements. In Mae Izzedin Asad and Sam Akel, Intervenor (T.C. Memo. 2017-80) the taxpayers sought innocent spouse relief from each other. The IRS has disallowed losses on their respective rental properties. Shortly before trial the IRS conceded the issue and agreed to relieve each of the taxpayers of their liabilities based on the rental property losses disallowed divided by the total losses claimed by the couple. The taxpayers suggested a 50-50 split based on the language in the divorce agreement. The Court held that since the IRS was not a party to the divorce agreement it was not binding on the IRS. The taxpayers argued that since their return was prepared by a professional they should be relieved of the accuracy-related penalty. The Court held it did not have jurisdiction since neither taxpayer petitioned the Tax Court in response to the IRS's notice of deficiency. In a stand-alone case for innocent spouse relief, the Court could only consider the issue of Sec. 6015 relief.
Tip of the DayLimits on IRA contributions . . . You can contribute to a traditional IRA (deductible or nondeductible) as long as you were not age 70-1/2 by the end of the year. There is no age limitation on contributions to a Roth. Both for either type of IRA you need to have at least as much earned income as your contribution. Contributions can be made for a spouse without earned income. With more people working at age 70 and beyond, having earned income is a real possibility. Whether it's a traditional or a Roth IRA, the maximum contribution you can make is $6,500 per individual ($5,500 regular contribution plus $1,000 over age 50 contribution). The contribution limit is a combined total for all IRAs. There are income limits on deductible and Roth IRAs, depending on your marital status.
May 23, 2017
NewsEmployers report employment taxes for Social Security, Medicare, unemployment insurance, and income taxes to IRS. In fiscal year 2016, these totaled almost $2.28 trillion. Each year, IRS examines a small percentage of employment tax returns to check employer compliance (known as operational examinations). The GAO (General Accountability Office) reviewed how practices from NRP (National Research Program) examinations could improve operational examinations. This report (1) evaluates how IRS plans to analyze the NRP results, (2) describes GAO's review of available NRP data, and (3) describes NRP practices IRS applied to operational examinations and assesses whether additional improvements could be made to operational examinations. GAO reviewed documentation, interviewed officials, and reviewed the NRP results. GAO also surveyed all IRS examiners who completed both NRP and operational examinations on ideas for improving operational examinations. The GAO recommended that IRS develop plans to analyze the NRP results in 2017 to address areas of noncompliance identified, and update its employment tax gap estimates; determine whether and when to provide certain data upfront before an examination starts; and periodically remind IRS examiners how they can access certain tools. IRS agreed with GAO's recommendations. For the complete report, go to www.gao.gov/products/GAO-17-371.
Retaining rights in an asset can mean it remains in your estate. In Estate of Nancy H. Powell, Deceased, Jeffrey J. Powell, Executor (148 T.C. No. 18) on August 8, 2008, the decedent's son, J, acting on her behalf, transferred cash and securities to LP, a limited partnership, in exchange for a 99% limited partner interest. LP's partnership agreement allowed for the entity's dissolution with the written consent of all partners. Also on August 8, 2008, J, purportedly acting under a power of attorney, transferred the decedent's LP interest to T, a charitable lead annuity trust, the terms of which provided an annuity to a charitable organization for the rest of the decedent's life. Upon her death, T's corpus was to be divided equally between her two sons. The decedent died on August 15, 2008. The Tax Court held that the decedent's ability, acting with LP's other partners, to dissolve the partnership was a right “to designate the persons who shall possess or enjoy” the cash and securities transferred to LP “or the income therefrom”, within the meaning of Sec. 2036(a)(2) and, because her LP interest was transferred, if at all, less than three years before her death, the value of the cash and securities transferred to LP was includible in the value of her gross estate to the extent required by either Sec. 2036(a)(2) or 2035(a). The Court also held that neither Sec. 2036(a)(2) nor Sec. 2035(a) (whichever applies) requires inclusion in the value of her gross estate of the full date-of-death value of the cash and securities transferred to LP; only the excess of that value over the value of the limited partner interest she received in return is includible in the value of her gross estate. (Sec. 2043(a)) Finally, the Court held that J's transfer of the decedent's LP interest to T was either void or revocable under applicable State law because her power of attorney did not authorize J to make gifts in excess of the annual Federal gift tax exclusion; consequently, the value of the 99% limited partner interest in LP, as of the date of her death, was includible in the value of her gross estate under Sec. 2033 or Sec. 2038(a).
Tip of the DayRead the fine print . . . When you opened your checking (or other) account you received a statement of the bank's rules. Banks periodically update the rules. Some are arcane; some can prove important. Providing a post-dated check to a contractor or vendor? If the holder of the check presents it to the bank before the date on the check, the bank can either pay on the check before the date or refuse to certify or pay the check before its date. The bank is not liable either way. If that makes other items bounce, the bank isn't liable. Much the same is true of stale checks. The bank is probably not required to pay an uncertified check six months after its date. If it pays it, the bank won't be liable. You might want to review your procedure for post-dated checks.
May 22, 2017
NewsThe IRS has announced it will conduct its annual Memorial Day systems maintenance beginning Friday, May 26, 2017, at 6 p.m. EDT and ending on Tuesday, May 30, 2017, at 5 a.m. EDT. E-Services Transcript Delivery System, TIN Matching, e-file and ACA applications will not be available during this timeframe.
The IRS has also reported that E-Services also will be unavailable Thursday, June 15 at 6 p.m. through Monday, June 19 at 6 a.m. as it moves to a different platform as part of a technology upgrade. All e-Services applications--including e-file and ACA applications, Transcript Delivery System and TIN Matching --will be offline during this timeframe. Applications will be available starting Monday, June 19.
In a Tax Court case First Rock Baptist Church Child Development Center (P1) and First Rock Baptist Church (P2) (148 T.C. No. 17) the IRS tried to collect P1's outstanding employment tax liabilities for 2007-2010, the IRS issued a Notice of Federal Tax Lien (NFTL) Filing and Your Right to a Hearing. This notice was sent to P1 at its correct address and showed P1's correct taxpayer identification number (TIN). However, the notice showed the addressee as P2, a separately incorporated church with which P1 is affiliated. P1 and P2 timely requested a collection due process (CDP) hearing, during which P1 requested that the NFTL be withdrawn and proposed an installment agreement. The settlement officer (SO1) concluded that P1's installment agreement could not be accepted and issued a notice of determination sustaining the NFTL filing. The notice of determination showed P1's correct address and TIN but showed P2 as the addressee. P1 and P2 jointly petitioned this Court, and upon the IRS's motion the case was remanded to the Internal Revenue Service (IRS) Appeals Office. On remand the settlement officer (SO2) determined that the lien documenation was ambiguous and that “lien withdrawal * * * is appropriate.” SO2 determined that P1's request for an installment agreement could not be granted because P1 was not in compliance with its ongoing tax return filing obligations. SO2 issued a supplemental notice of determination that showed P1's correct address and TIN but again showed the addressee as P2. P1 sought to dispute its underlying tax liabilities and the rejection of its proposed installment agreement. The IRS contended that this case is moot because P1 secured the principal relief it had requested, withdrawal of the NFTL. The Court held it has jurisdiction to review SO2's determination to the extent he denied relief requested by P1, to which the notice of determination was issued and which is the subject of the IRS collection action, but the Court does not have jurisdiction over P2 because it is not the subject of IRS collection action and no notice of determination was issued to it. The Court also held the case is not moot because, notwithstanding the withdrawal of the NFTL, there remains a live case or controversy between P1 and the IRS concerning the correctness of SO2's “determination.” Additionally, the Court held it could not consider P1's challenge to its underlying tax liabilities because it did not raise that challenge at the original or supplemental CDP hearing. Finally, the Court held that SO2 did not abuse his discretion in denying P1's request for an installment agreement because P1 at that time was not in compliance with its ongoing tax return filing obligations.
Tip of the DayBasis for amortization/depreciation deductions . . . Before taking an amortization or depreciation deduction, you've got to be able to show you've got a basis in the asset. For example, you may be able to amortize start-up expenses, developed intangibles, etc. or physical assets such as purchased or constructed equipment or buildings. If you purchased the asset you've got a receipt or bill of sale. But what if you self-constructed it? The IRS will not just accept that you expended $20,000 in constructing a special machine to use in your business. You've got to have receipts and canceled checks and show that you didn't deduct those expenditures elsewhere. If you had your own employees working on the project you want to be able to reconcile total payroll with currently deducted and capitalized expenditures. The amounts involved can be substantial and may not be challenged immediately. For example, you used in-house labor to construct a building. Seven years later the IRS challenges your depreciation deduction. Do you still have the documentation to prove your basis?
May 19, 2017
NewsAn individual can deduct a net operating loss (NOL) arising from a loss (e.g., from a sole proprietorship, S corporation) in a prior or subsequent year (carryforward or carryback) but you've got to substantiate the loss. A taxpayer substantiates his claim to such a deduction by filing with his return “a concise statement setting forth the amount of the net operating loss deduction claimed and all material and pertinent facts relative thereto, including a detailed schedule showing the computation of the net operating loss deduction.” In Barry Leonard Bulakites (T.C. Memo. 2017-79) the taxpayer filed no such documentation. In a second issue, the IRS disallowed interest payments on a loan. The Court sided with the IRS in disallowing the interest deduction because the payments did not match the deductions on the return, the discrepancy was not explained at trial, the taxpayer did not provide business records regarding the loan, any loan schedules or any loan-repayment schedules. The Court tried to help, but couldn't figure out what happened to the loan. The Court was also puzzled by the lack of any paperwork where there should have been volumes.
Tip of the DayWhere not to cut product costs . . . It may be hard to raise prices so the only other option is to cut costs. But be careful where you cut. One manufacturer who sold a tool for about $40 either by design or accident saved some money on a 19-cent part, the battery hatch. Sure enough, the part failed from fatigue within 2 years on some 40 percent of the units. The company replaced some of the units at a cost of $12 each and wrote "sorry, out of warranty" letters to the remaining customers. Not a great outcome. Be careful where you cut costs.
May 18, 2017
NewsWhere do we stand on tax legislation? The turmoil in the White House has pushed down the priority probably more than a few notches.
You can only deduct unreimbursed business expenses if your employer has a policy of not reimbursing, or not reimbursing in full. In Kenneth D. Humphrey (T.C. Memo. 2017-78) the taxpayer worked for the Department of Homeland Security which required employees to obtain authorization before incurring a reimbursable expense. Here the taxpayer never sought reimbursement. The Court noted the taxpayer bears the burden of establishing that his employer would not have reimbursed him for such expenses. If the employer has a policy of reimbursing, the taxpayer must show he sought reimbursement. The Court denied a deduction for the expenditures. The Court also denied the taxpayer a deduction for legal fees because he could not show they were related to his trade or business (of being an employee).
Tip of the DayWeb or bricks and mortar? . . . Some 17 years ago many companies thought the web would make all retail stores obsolete. It wasn't more than a couple of years later that clearly wasn't going to happen. Now many retailers are closing stores, unable to compete with the web. What's the bottom line? It's more than likely the best model depends on what you're selling. Always buy similar sneakers from the same company? Ordering on-line is the way to go. Buying a men's suit? Chances are it'll need alterations. Dress shops are vulnerable, as are toy stores. Stores may survive only to see sales reduced and margins pinched by on-line sales. If you're planning a new venture, do your homework and look down the road--things could change quickly.
May 17, 2017
NewsYou have 90 days from the date the IRS mails a notice of deficiency to file a petition in Tax Court contesting the notice. That deadline is absolute. In Nancy M. Rubel, a.k.a. Nancy M. Zawadzki (U.S. Court of Appeals, Third Circuit) the taxpayer sought a review of the IRS's decision to deny innocent spouse treatment to the taxpayer. The notice of deficiency advised the taxpayer of the 90-day deadline. The taxpayer, before filing her petition, submitted additional information to the IRS. The IRS informed the taxpayer that it considered the information and still proposed to deny relief. The IRS advised the taxpayer that this additional review didn't extend the time for filing a petition with the Tax Court and then went on to say the deadline for filing was April 19, 2016, when the actual deadline was April 12. The taxpayer filed the petition on the 19th. The Tax Court dismissed the petition for lack of jurisdiction. The Court found the Tax Court was correct and lacked jurisdiction because the petition was untimely. While the IRS's administrative mistake may have contributed to the taxpayer missing the deadline, the deadline is jurisdictional and cannot be altered "regardless of the equities" of the case.
Tip of the DayBad credit score? . . . Trying to improve your credit score? One way is to reduce the amount outstanding on each card. Your score will improve when the percentage used decreases. You need to get it below half, preferably even less. There's another plus here. If you use the card infrequently, or not at all, you can call and tell the card issuer you'd use it more if the interest rate was lower. You could get the rate dropped. While closing accounts can actually reduce your credit score, you can drop one card a year without any effect. Another way to boost your score? Get a car or similar installment loan. Sounds counter intuitive, but it works.
May 16, 2017
NewsIf you purchase an annuity with after-tax funds, when you receive distributions from the annuity part of each distribution is income and part is a return of your investment in the contract. If your employer purchases the annuity for your retirement with his funds or you provide the funds with pre-tax contributions, each distribution is fully taxable. In Christopher S. Harrell, Sr. et ux (T.C. Memo. 2017-76) the taxpayer (wife) received distributions from the New York City Employees' Retirement System (NYCERS) as the beneficiary of her deceased father. The taxpayers excluded from income the full amount of the distributions. The Court found that a letter from NYCERS states that the taxpayer's benefit payable of $403,829 comprising a member's share of $11,245 and an employer's share of $392,584. The Court noted the taxpayers had not produced evidence showing that the $11,245 was her father's investment in the contract. The evidence strongly suggested that the member's share of $11,245 was his required basic employee contribution that was not previously includable in gross income. The Court the full amount of each distribution would be taxable. The Court did take into account the fact the taxpayer's father died before August 21, 1996 she would be entitled to a $5,000 death benefit which would make $86 of each distribution nontaxable.
Tip of the DayRevocable trusts and probate . . . Many individuals have been told to fear probate, often to the point where they go to great lengths to avoid it. That may be misguided. You should know that probate is the legal procedure for settling a decedents estate. It has nothing to do with estate taxes. A revocable trust is a means of transferring property outside of the estate. It doesn't save estate taxes. If you have a current, well-written will, probate can be relatively straight-forward and fast and often not expensive. And the biggest job, marshalling and valuing the assets often has to be done regardless. While the use of trusts will speed the distribution of assets, it also means they will be distributed to the beneficiaries regardless of the values at the time of death. Splitting an estate equally among several heirs can be difficult. Much of the work of the executor and/or attorney is involved in work the heirs can do such as getting appraisals, selling off assets, transferring asset ownership, etc. Each estate is different. Putting a vacation property or rental into a revocable trust may make sense. Putting your stock portfolion in a trust may not. Get good advice from an independent source.
May 15, 2017
NewsAs a result of severe winter storms, flooding, landslides and mudslides during the period of January 30 to February 22, 2017 in certain areas of Washington the president has found the counties of Adams, Benton, Columbia, Franklin, Grant, Lewis, Lincoln, Pend Oreille, Skamania, Spokane, Wahkiakum, Walla Walla and Whatcom eligible for federal assistance. Thus, taxpayers in these counties who sustained losses attributable to the disaster may deduct the losses on their 2017 or 2016 returns.
In Gary Ervin, et al. (U.S. District Court, W.D. Kentucky) the IRS determined a valuation misstatement penalty. A jury found the penalty did not apply, based on reasonable cause. In the current case the IRS argued that the taxpayers should not be entitled to a refund of the penalty and interest because they received a large settlement from their tax advisors. A refund, the IRS claimed, would result in a double recovery. The Court sided with the taxpayer in finding the improperly assessed and collected penalty and interest had to be refunded.
Tip of the DayResearch credit . . . Taxpayers who incur expenditures for research and development may be entitled to a tax credit. The computation of the credit can be complicated, but for a company that does significant research, the dollar amount can be significant. Any credit unused in a year can be carried forward, but that may be small comfort to a business that anticipates a number of years of losses. Qualified small businesses have a new option. For tax years beginning after December 31, 2015 they can elect to apply a portion of the credit against the 6.2 percent payroll tax. That provides an immediate cash flow benefit. The election must be made on a timely filed (including extensions) return.
May 12, 2017
NewsYou can claim a credit against your U.S. taxes for any foreign taxes paid. In Panagiota Pam Sotiropoulos (T.C. Memo. 2017-75) the taxpayer was a U.S. citizen living and working in the U.K. She claimed credit for taxes withheld on her U.K. wages. But here U.K. income tax returns showed large overpayments for which she received refunds. The IRS computed her foreign tax credit on the taxes after the refund. She argued that the amounts were not refunded because her ultimate entitlement to the refunds remained under investigation. The Court did not agree and found that the repayments of U.K. income tax the taxpayer received during the years at issue represented previously paid foreign tax that was refunded in whole or in part.
Deductions for rental properties are limited in a number of ways. In Christoper R. Cooke (T.C. Memo. 2017-74) the IRS claimed the taxpayer used the property as a residence when he visited it during the years at issue. Under Section 280A(a) generally no deduction is allowed with respect to any dwelling unit that the taxpayer uses as a residence during the taxable year. A dwelling unit is used as a residence if the taxpayer uses it for personal purposes for more than the greater of 14 days or 10% of the number of days during the taxable year that the unit is rented at a fair rental value. The use of a pass-through entity to hold the property does not change the result. If a taxpayer uses a dwelling unit for personal purposes for any part of a day, generally that day is counted as one of personal use for determining whether the taxpayer used the unit as a residence during the taxable year. If a taxpayer performs maintenance substantially full time on any day, that day will not constitute personal use. The taxpayer presented logbooks to show he did perform the required amount of maintenance. The Court noted that based on taxpayer's testimony an logbooks there was no evidence of disrepair to the property and there were no specific details on what was done to improve it. The Court also noted that during the years at issue a series of caretakers lived at the property and were supposed to perform maintenance duties. The taxpayer also testified he reconstructed the logbooks from his accounting records. The Court also made a distinction between business activities related to the property and maintenance. Maintenance activities would count as a nonpersonal day; business activities would not. The Court sided with the IRS in finding the property was used more than 14 days for personal purposes and disallowed the rental losses.
Tip of the DayRestrictions on sale of ownership interest . . . You should make sure there are restrictions on the transfer of any ownership interest in your business. You don't want to find out one day you have a new partner because the best friend you started the business with had to give up part or all of his or her interest because of divorce, financial problems, etc. There's no easy answer here. Talk to your attorney on how best to handle the restrictions.
May 11, 2017
NewsThe IRS is reminding taxpayers that the Form 990 for calendar-year tax exempt organizations is due May 15th. Small tax-exempt organizations with average annual gross receipts of $50,000 or less may file an electronic notice called a Form 990-N (e-Postcard). This form requires only a few basic pieces of information. Tax-exempt organizations with average annual gross receipts above $50,000 must file a Form 990 or 990-EZ, depending on their receipts and assets. Private foundations must file Form 990-PF.
In Eddie Borna et ux. (T.C. Memo. 2017-73) the Court agreed with the IRS's reconstruction of the taxpayer's income using the bank deposits method. The Court noted the failed to keep proper books and records. The Tax Court also found the taxpayer failed to report gains on the sale of four properties. The Court noted a cash method taxpayer who receives proceeds under a claim of right and without restriction as to their disposition is currently taxed on the receipt in the taxable year of receipt even if, in a later taxable year, some or all of the proceeds must be returned. In this case the taxpayer had to report the four sales even tough they were rescinded in the following year.
Tip of the DayScan it . . . Now that you've done your taxes (or even if you're on extension) consider scanning your documentation. Doing so solves two problems--one, you've got a copy in case you lose the paper in a fire, flood, etc. or just misplace it. The IRS and courts don't accept excuses, no matter how good they are. You may be able to get a portion of the original deduction for many items, but auto mileage, T&E, etc. are not entitled to any leeway. Two, while you should still keep paper for three years for several reasons, after that you can send much of the material to the shredder. Individuals and many small business owners can scan the documents on a multifunction copier/printer/scanner. Most of the material can be loaded 25 to 50 sheets at a time. Nonstandard documents (e.g. cash register receipts) will take a little more work, but it'll be worth it. Devices have become cheap and reliable. And don't forget to scan the hard copy of your tax return.
May 10, 2017
NewsRevenue Procedure 2017-38 (IRB 2017-22) modifies Rev. Proc. 2017-3, which sets forth areas of the Internal Revenue Code (Code) on which the Internal Revenue Service (Service) will not issue letter rulings or determination letters (no-rule areas).
Settlements received for personal physical injury or physical sickness are not includable in income. In Danielle Jan Bates et vir (T.C. Memo. 2017-72) the taxpayer was injured on the job and as a result her job attendance suffered for which the company. She sued and settled with the company for $65,000 comprised of $5,000 for lost wages, $38,286 relating to emotional distress, and $21,714 for attorney's fees and costs. The company issued a Form 1099-MISC for the lost wages and emotional distress. The taxpayer excluded from income the amount for emotional distress. The Court concluded the settlement agreement was the $38,286 payment was for emotional distress and had to be included in income. The Court noted the nature of the claim that was the actual basis for settlement controls whether those damages are excludable under Section 104(a)(2).
Tip of the DayMissed issues . . . Seems that everything in life is more complicated these days and everyone is a specialist. It may be up to you to make sure that a professional doesn't miss something. You go to a lawyer to draft a purchase agreement for some property. He also helps with the loan agreement. He knows you use a CPA for your business accounting and tax work so he assumes you'll get the CPA's opinion on some of the terms in the loan agreement. But you assume the attorney is in charge and you don't have to consult another professional. That can be a mistake. You can't blame the attorney here. The reverse can also be true. The smart move would be to ask the attorney if you should be discussing any portion of the agreement with your CPA.
May 9, 2017
NewsIn Bernard P. Malone et ux. (148 T.C. No. 16) the taxpayers were partners of a partnership that was subject to the unified audit and litigation procedures of Secs. 6221-6234. They did not report their share of partnership items on their return and did not file a notice of inconsistent treatment. The IRS assessed the tax attributable to the partnership items as originally reported by the partnership. In this deficiency proceeding, the IRS asserted a negligence penalty relating to the taxpayers' failure to report partnership items. The taxpayers moved to dismiss the penalty from this case, asserting that the Tax Court lacks jurisdiction over a penalty relating to their inconsistent reporting. Deficiency procedures do not apply to “penalties, additions to tax, and additional amounts that relate to adjustments to partnership items”. Sec. 6230(a)(2)(A)(i). The Court held that because there were no adjustments to partnership items, deficiency procedures apply to the penalty asserted by the IRS.
Tip of the DayDeath tax . . . No, we're not talking about the estate tax. This one hits people of any income. If you file a joint return while your spouse is alive you're entitled to lower tax rates at the same income level (until you reach the highest bracket) as a single individual, you're entitled to a $500,000 exclusion on the gain on the sale of your home (drops to $250,000 if single), capital gains and dividends may be taxed at a lower rate, the phaseout for exemptions and itemized deductions occurs at a higher AGI, etc. As a result unless you remarry, there's a good chance your taxes will be higher in the year after your spouse's death. (You've got a little more time on the sale of your home; there's a delay of two years till the exclusion is reduced.) What about your income? Obviously you'll lose your spouse's Social Security and any wage income. The status of their pension will depend on a number of factors. Plans such as a 401(k) or IRA could be reduced if you're not the beneficiary. Your income is unlikely to drop in half but your expenses may not decrease much at all if you're already retired. Keep this in mind when you're doing retirement planning.
May 8, 2017
NewsRevenue Ruling 2017-09 provides guidance regarding the federal tax treatment of certain transactions referred to as ‘north-south’ transactions. The guidance describes two "north-south transactions": one involving steps that are respected as separate and another involving steps that are integrated.
Depending on your investments, how you want to distribute your estate, and other factors, diligent estate planning can save a considerable amount, but not all structures will work. In Estate of John F. Koons, III, Deceased, et al. (U.S. Court of Appeals, Eleventh Circuit) the Court upheld a Tax Court decision (T.C. Memo. 2013-94) finding the Tax Court did not err in determining the fair market value of revocable trust's interest in an LLC. Reductions in value based on discounts were not allowed and that certain redemptions the taxpayer argued would not occur the Court found were likely to happen based on offers already made. In addition, a $70 million deduction for interest to cover a loan to pay the estate taxes was not necessary since the estate's assets were liquid and repayment of the loan would be made from any future distributions.
Tip of the DayUnreimbursed employee business expenses . . . If your employer doesn't reimburse you for travel between offices, taking clients to lunch, business trip, etc., you can deduct those expenses on Schedule A of your Form 1040. But, in addition to some strict recordkeeping requirements associated with travel and entertainment, you'll also have to show that your employer had a policy of not reimbursing. The expenses are not deductible if you could have sought reimbursement from your employer, but just elected not to. If you're audited be prepared to show the IRS a statement from your employer showing a policy of not reimbursing. Plan ahead. That may be hard to obtain if you've left the job or the company went out of business. And don't count on the testimony of your employer.
May 5, 2017
NewsRevenue Procedure 2017-37 (IRB 2017-21) provides the 2018 inflation adjusted amounts for Health Savings Accounts (HSAs) as determined under section 223 of the Code.
Revenue Procedure 2017-36 (IRB 2017-21) procedure provides indexing adjustments for certain provisions under sections 36B and 5000A of the Code. In particular, it updates the Applicable Percentage Table in Sec. 36B(b)(3)(A)(i) to provide the Applicable Percentage Table for 2018. This table is used to calculate an individual’s premium tax credit. This revenue procedure also updates the required contribution percentage in Section 36B(c)(2)(C)(i)(II) for plan years beginning after calendar year 2017. The percentage is used to determine whether an individual is eligible for affordable employer-sponsored minimum essential coverage under Section 36B.
An individual can exclude up to $102,100 (2017 amount; indexed for inflation) of foreign earned income for a taxable year, if he or she makes an election to do so. The election must be made on a timely filed income tax return (including extensions), on an amended return. In the case of Damon Aaron Redfield (T.C. Memo. 2017-71) the taxpayer didn't file any return until after the IRS created a substitute for return and receiving a notice of deficiency from the IRS. The Tax Court held that the taxpayer failed to make a timely election and cold anot exclude the foreign earned income.
Tip of the DayMatch assets to need . . . Many business asset purchases are made rationally, but within the box. One of the salesmen at Madison Inc. needs a new car. He visits customers and takes them to lunch in the vehicle several times a week. The company has to buy a well-equipped new, higher-end car every three years. The company can shop for price, but it really doesn't have much flexibility. Madison also needs another pickup truck to haul tools and equipment around the plant site. The farthest the truck will ever go is 3 miles to town for supplies and mail pickup. Annual mileage is likely to be less than 4,000. No need to purchase new, or even in anything more than fair condition. You could save more than $15,000 by buying used and older. While you may spend more on maintenance, insurance (and personal property taxes) would be less. We know one company that keeps a tool kit at its remote locations. A name brand setup would cost over $1,500. For 10 locations that would be $15,000. But the company purchased off-brand tools at a discounter for $400. Granted, the tools aren't for everyday use, but the tool kits are only for emergencies. The same logic can apply to office equipment such as fax machines, laptops, etc. Buy quality if the item is used heavily or you've got to rely on it; otherwise consider going cheap.
May 4, 2017
NewsThere is an agreement on an appropriations bill that would continue to fund the federal government through September, 2017. Funding for the IRS is included and unchanged from the fiscal year 2016 amount.
Documentation is key to securing a deduction. In John Wainwright, Keerti Varmaa, Next Friend (T.C. Memo. 2017-70) the taxpayer lost a number of deductions because of no or inadequate documentation. The taxpayer claimed the residential energy credit for the installation of new windows. The Court found the invoice did not detail what type of windows were installed or at which property they were installed. In addition the taxpayer's name was not on the invoice and there was no indication who made the payments. With respect to a casualty loss the Court found that the documentation submitted was insufficent to substantiate the total cost of the repair work and how much of the cost was reimbursed by insurance. In addition, most of the documentation did not include the taxpayer's name. The Court agreed with the IRS and disallowed the energy credit and the casualty loss deduction.
Tip of the DayCash received from customers . . . Most business owners have heard at least something of the reporting requirements if large amounts of cash are received from a single customer. If you receive more than $10,000 cash in a trade or business, you've got to file a Form 8300 by the 15th day after the cash was received. But the rules are trickier than the short requirement just presented. First, cash includes U.S. and foreign currency, cashier's checks, money orders, bank drafts, and traveler's checks. It does not include a check drawn on the person's own personal or business account. Second, the transaction involved can be for the purchase of personal, real, or intangible property, for personal or business services or for the payment of a debt or for escrow or trust funds. Third, while the threshold is $10,000, related transactions must be aggregated. The last one can get tricky. For example, Fred orders a tractor that's to be delivered after some modifications to the floor model. Fred puts down $7,000 in cash on May 4. On May 6 he puts down an additional $5,000. The total is $12,000 and he's broken the $10,000 threshold. The tractor dealer must file a Form 8300 on the transaction. If you have to file a Form 8300 you'll need the payor's name, tax ID and some other information you might not normally request. You should be familiar with the requirements. What's the penalty for failure to report? If the failure is due to an intentional or willful disregard of the reporting requirements, the minimum penalty is $25,000. As always, the rules are more complex. See Form 8300 and the attached instructions.
May 3, 2017
NewsThe IRS has announced that this summer--the tentative date is June 18--the e-Services’ platform will move to a more modern technology. One result will be an improved look and feel of applications, including the e-File application. Use of e-Service products will not be affected. There are no changes to the log-on process.
Section 83(a) applies where property is transferred to a taxpayer “in connection with the performance of services.” In such a transfer, the excess of the FMV of the property over the amount (if any) paid for the property is included in the taxpayer's gross income for the first taxable year in which the taxpayer's rights in the property are transferable or “are not subject to a substantial risk of forfeiture.” But that rule doesn't apply if you're a majority shareholder and, thus, in control of the entity. In Larry E. Austin et ux.; Estate of Arthur E. Kechijian, Deceased, et al. (T.C. Memo. 2017-69) two shareholders owned 47.5% of the S corporation; an ESOP owned the remaining 5%. The restricted stock agreement provided a 5-year earnout period and that either shareholder would forfet 50% of the value of his shares if he voluntarily terminated his employment with the corporaton before January 1, 2004 (five years from the date of thd agreement). The Court found there was a substantial risk of forfeiture.
Tip of the DayWhat's the commission? . . . A good first question to ask before investing. If the commissions are high, the second questions should be why. Don't assume anything. The commission on stocks is generally small. But that's not always true for mutual funds. Commissions of 4% are not that unusual. In the case of annuities, special investments such as nontraded securities, partnerships, hedge funds, etc. the commissions can be much higher. In some cases they may be unavoidable or worth it, but you should know what they are before investing. You don't want to be down 10% the day you buy in. And, while it would be nice if high commissions correlated with high returns, that's often not the case. In fact, it's not unusual for high commissions to be associated with mediocre or poor investments.
May 2, 2017
NewsIn order to claim a deduction for an expense, you've got to have all the elements. In Patricia S. Windham (T.C. Memo. 2017-68) the taxpayer presented over a 100 receipts for meals and entertainment, but some were duplicates and some were illegible. The receipts included the names of those entertained, but did not show the business purpose of the meal. The Court noted that the taxpayer did not provide testimony about any meals specifically and did not identify if the meals were for her work as a stock broker, her rental real estate activities, or the charities for which she volunteered. As a result the Court did not allow any of the expenses as a deduction. The taxpayer also claimed a deduction for cell phone use but because she offered no testimony as to how many minutes were used in each of her activities, the Court had no way to apply the Cohan rule and disallowed the deduction. The taxpayer fared better with her rental properties. The Court found she was a real estate professional in that, based on her testimony, she spent more than 750 hours on her rental real estate activities which was more than half of the time spent in personal service hours. The Court nopted she spent a considerable amount of time and money in keeping the rental activities viable, collecting rents, overseeing repairs, etc.
Tip of the DayPlan ahead for sales growth . . . The economy continues to improve, albeit in uneven measure. But if your business is picking up you should plan ahead for staffing. For most jobs it takes some time for a new employee to become truly productive. How long that takes can depend on a number of factors. A skilled professional may be able to get up to speed doing manufacturing or service work very quickly--for example a licensed plumber. Others may take from a week to a year, depending on the job, the individual's experience, etc. Management positions too can vary, depending on the position being filled and the nature of the industry. You don't want to have to turn down work because you don't have the staff. In some cases hiring in anticipation is your only option; in others you can do some groundwork to make the actual hiring and training process easier. And there is some evidence that the job market is getting tighter.
May 1, 2017
NewsYou or one of your friends has probably gotten a call from someone claiming to be from the IRS saying that you owe money and to avoid losing your driver's license, jail time, or some other consequence you must pay immediately with a wire transfer, iTunes card, etc. Agents for the Treasury Inspector General for Tax Administration (TIGTA) Social Security Administration Office of the Inspector General (SSAOIG) recently arrested eight suspects in Miami, FL for conspiracy to commit wire fraud. According to the court documents, the suspects are responsible for almost $8.8 million in schemes that defrauded more than 7,000 victims. TIGTA reported that this impersonation scam has resulted in reported losses to taxpayers of more than $55 million and TIGTA is making progress in investigations related to this type of scam. (Note. If you owe money your first contact with the IRS will not be a phone call. You'll receive correspondence by mail.)
Tip of the DayCredit score . . . There are a number of ways to improve your credit score. One is obvious. Reduce your overall credit card debt and don't add cards. But you can improve your score and still carry relative high debt by paying down individual cards so that your balance is 40% or less of your credit line. And, ironically, you can also boost your score by having an installment loan such as a car loan. Business owners may be able to improve their score by providing updated or more detailed information on their earnings. If you and your spouse have both joint and separate cards, you've got to evaluate your situations individually. It's not usual for the scores of two spouses to be materially different.
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