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July 9, 2008
News
T.D. 9411 and REG-164965-04 are the final and proposed regulations relating to elections to deduct start-up expenditures under Sec. 195, organizational expenditures of corporations under Sec. 248 and organizational expenses of partnerships under Sec. 709. The regulations also update the manner in which taxpayers elect to deduct costs under sections 195, 248, and 709. Under these regulations, taxpayers are no longer required to file a separate election statement to deduct costs under sections 195, 248, and 709. The manner of filing these elections is changed because of various electronic return filing initiatives and in acknowledgment that the vast majority of taxpayers that incur costs that may be deducted under sections 195, 248, and 709 elect to deduct those costs. The change also reduces the administrative burden of making the elections.
The IRS has issued final regulations (T.D. 9410) relating to the discharge of liens under Section 7425 and return of wrongfully levied upon property under Section 6343. These regulations revise regulations currently published under Sections 7425 and 6343. These regulations clarify that such notices and claims should be sent to the IRS official and office specified in the relevant IRS publications. The regulations will affect parties seeking to provide the IRS with notice of a nonjudicial foreclosure sale and parties making administrative requests for return of wrongfully levied property.
Revenue Ruling 2008-41 (IRB 2008-30) provides taxpayers with guidelines on dividing a charitable remainder trust (CRT) into two or more separate and equal CRTs without violating the provisions of Sec. 664.
Fines and penalties are generally not deductible. In a recent coordinated issue paper, the IRS concluded that, in accordance with Sec. 263A(a)(2), Sec. 1.61-3 of the regulations, a taxpayer may not include in the basis of assets it produces under Sec. 263A or in the basis of property under Sec. 1012, the portion of the supplemental environmental projects costs that represents an amount analogous to a nondeductible fine or penalty under Sec. 162(f). Further, under Sec. 162(f), a taxpayer may not deduct cash payments to an environmental endowment or similar fund, when such payments are made in lieu of paying a fine or similar penalty to the environmental agency itself.
Tip of the Day
Keep supply shelves stocked . . . Four years ago the cost of operating a car was a little more than half of what it is today. Then it made sense to keep office or operating supplies' inventory to a minimum and keep the cash for operations. That may no longer be true. Add to transportation costs the lost employee time. Having an extra toner cartridge, box of paper, etc. on hand, makes sense if it saves you a trip to the store or your supplier. In addition, it makes more sense than ever to make a list before heading out. You may have decentralized purchasing some years ago; it may be time to consider centralizing once again. As usual, there's no easy rule of thumb. If you're in the city or a metro area you may only be a mile from your suppliers; in a rural area it could be 20 miles or more. On the other side, keeping an extra box of paper on hand won't tie up much capital or take up much space; operating supplies could be much more expensive.
July 8, 2008
News
Rev. Rul. 2008-38 (IRB 2008-31) ruled on the treatment of a limited partner's interest expense. First, it held that in the case of an individual, interest paid or accrued on indebtedness allocable to property held for investment described in Sec. 163(d)(5)(A)(ii) is (after the application of the Sec. 163(d)(1) limitation) a deduction described in Sec. 62(a)(1) and is therefore taken into account in determining the individual's adjusted gross income. Second, the ruling held that if an individual has both investment interest expense attributable to indebtedness allocable to property described in Sec. 163(d)(5)(A)(i) and investment interest expense attributable to indebtedness allocable to property described in Sec. 163(d)(5)(A)(ii) and the individual's aggregate investment interest expense is greater than the individual's net investment income, the individual must allocate the individual's net investment income between the two categories of investment interest expense using a reasonable method of allocation. One reasonable method of allocation is to allocate the individual's net investment income to the two categories of investment interest in proportion to the relative amounts of interest expense within each category. Rev. Rul. 2008-12 amplified. See also Announcement 2008-65 (IRB 2008-31).
Tip of the Day
Picking right tenant for commercial space . . . If you own office or retail space that you rent out, you want to make sure it's rented. But getting a tenant quickly may not be as important as getting the right one. You want to make sure the tenant will be able to pay the rent and last the term of the lease. Even if the tenant is personally liable for the rent, that may be small consolation in the current market. If his business can't pay, chances are he'll be in financial trouble personally as well. Check the credit rating of the business before signing the lease. And, unless you've got some real business savvy, you should also seek the counsel of your financial advisor or accountant. Renting to a local mom and pop business that's in a competitive market is much riskier than taking a store or franchise of a national brand. You don't want that space to go empty again a year from now. It could acquire a reputation as a poor location and become more difficult to rent.
July 7, 2008
News
Victims of recent storms and flooding in Missouri may qualify for tax relief from the IRS. Following severe storms and flooding on June 1, the federal government declared Clark, Lewis, Lincoln, Marion, Pike, Ralls and St. Charlies counties a presidential disaster areas qualifying for individual assistance. As a result, the IRS is postponing until August 29 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 June 1, 2008 and August 29, 2008. In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after June 1 and on or before June 16, as long as the deposits were made by June 16. For additional information, go to www.irs.gov/newsroom/article/0,,id=184421,00.html.
Tip of the Day
Tax credit for continuing to pay reservists called to duty . . . A recently enacted tax credit allows eligible small businesses (average of fewer than 50 employees) to take a credit of up to 20% of the military differential wage payments to a qualified employee. A differential wage payment is a payment made to an individual while he or she is performing service in the uniformed services while on active duty for a period of more than 30 days. The payment must represent all or a portion of the wages that the individual would have received from the business if he or she worked for the business. Only the first $20,000 of such differential payments made to a qualified employee during the year qualify (e.g., the maximum credit per year per employee is $4,000). The credit applies to payments made after June 17, 2008 and on or before December 31, 2009.
July 3, 2008
News
An S corporation's AAA (Accumulated Adjustment Account) tracks the amount of undistributed income that has been taxed to the shareholders, similar to the manner in which E&P generally tracks a C corporation's undistributed income. The AAA is the mechanism that allows previously taxed but undistributed income to be distributed tax-free to S corporation shareholders to the extent of the shareholders' basis in their stock. In Rev. Rul. 2008-42 (IRB 2008-30) the IRS held that premiums paid by an S corporation on an employer-owned life insurance contract, of which the S corporation is directly or indirectly a beneficiary, do not reduce the S corporation's AAA and the benefits received by reason of the death of the insured from an employer-owned life insurance contract that meets an exception under Sec. 101(j)(2) do not increase the corporation's AAA.
Notice 2008-61 (IRB 2008-30) suspends certain requirements under section 42 of the Internal Revenue Code for certain low-income housing credit properties in the United States as a result of the devastation caused by severe storms, tornadoes, and flooding in Wisconsin beginning on June 5, 2008. The IRS has issued final regulations (T.D. 9408) relating to a claim that a child is a dependent by parents who are divorced, legally separated under a decree of separate maintenance, or separated under a written separation agreement, or who live apart at all times during the last 6 months of the calendar year. The regulations reflect amendments under the Working Families Tax Relief Act of 2004 (WFTRA) and the Gulf Opportunity Zone Act of 2005.
The IRS has issued final and temporary (T.D. 9409) and proposed (REG-121698-08) regulations (T.D. 9409) that provide rules relating to the disclosure and use of tax return information by tax return preparers. These regulations provide updated guidance regarding the disclosure of a taxpayer's social security number to a tax return preparer located outside of the United States.
Notice 2008-62 (IRB 2008-29) notifies the public of the intent of the IRS to issue proposed regulations that will address, among other things, when an arrangement in which an employee or independent contractor receives recurring part-year compensation over an extended period, such as a 12-month payment schedule, (e.g. school employees who work for 10 months but whose pay is spread over 12 months) does not constitute deferred compensation for purposes of section 457(f). Until further guidance is issued, taxpayers may rely on the rule described in section II of this notice for purposes of both sections 457(f) and 409A.
Rev. Proc. 2008-35 (IRB 2008-29) provides guidance to tax return preparers regarding the format and content of consents to disclose and consents to use tax return information with respect to taxpayers filing a return in the Form 1040 series, e.g., Form 1040, Form 1040NR, Form 1040A, or Form 1040EZ, under Section 301.7216-3. This revenue procedure also provides specific requirements for electronic signatures when a taxpayer executes an electronic consent to the disclosure or use of the taxpayer's tax return information. This revenue procedure modifies and supersedes Rev. Proc. 2008-12, to provide guidance pursuant to section 301.7216-3T(b)(4)(ii).
Tip of the Day
Government petitions court to serve John Doe summons on Swiss bank . . . Think that foreign account is safe from the IRS? Maybe not. A number of countries have agreements with the U.S. that allows their banks and other financial institutions to disclose information to the IRS. The U.S. has now filed a petition in a U.S. District Court to gain permission to serve a John Doe summons on a Swiss bank with branches in the U.S. for a list of taxpayers who had an interest in an account at a Swiss office of that bank and where the bank did not have Forms W-9 executed (showing taxpayer I.D. numbers) and where the bank did not file 1099s. Clearly if the bank reports that you had an account but they did not send you a 1099, the IRS will be looking to contact you. Using foreign accounts for anything but legitimate purposes is getting more dangerous all the time.
July 2, 2008
News
Beginning with tax returns due on or after January 1, 2009, partnership and trust returns can only receive an automatic five-month extension of time to file. Please see our article Filing Extensions to be Shorter for Partnerships and Trusts Starting Later this Year for complete details.
Revenue Ruling 2008-40 holds that the transfer of amounts from a trust under a plan qualified under Sec. 401(a) of the Code to a nonqualified foreign trust is treated as a distribution from the transferor plan. This revenue ruling also holds that a transfer of assets and liabilities from a plan qualified under Sec. 401(a) to a plan that satisfies Section 1165 of the Puerto Rico Code is treated as a distribution from the transferor plan.
The IRS has issued final regulations (T.D. 9405) relating to employment tax adjustments and employment tax refund claims. The final regulations modify the process for making interest-free adjustments for both underpayments and overpayments of Federal Insurance Contributions Act (FICA) and Railroad Retirement Tax Act (RRTA) taxes and Federal income tax withholding (ITW) under sections 6205(a) and 6413(a), respectively, of the Internal Revenue Code (Code). These regulations also modify the process for filing claims for refund of overpayments of employment taxes under Sections 6402 and 6414.
The IRS has issued final and temporary regulations (T.D. 9407) relating to the simplification of procedures for obtaining automatic extensions of time to file certain returns. For these returns, the final and temporary regulations also remove the requirements for a signature and an explanation of the need for an extension of time to file. The final and temporary regulations affect taxpayers who are required to file certain returns and need an extension of time to file.
Tip of the Day
Accounting for rebates . . . Mail-in rebates are a staple in retailing today. They work for the retailer because customers often don't redeem the rebate coupons. In a recent IRS legal memorandum (ILM 200826006) the taxpayer was a retailer of consumer products using the accrual method of accounting. The customer would pay full price at checkout, but would receive a rebate if he mailed in the coupon. Based on experience, the taxpayer estimates that it pays or redeems only x percent of the total rebate offers. For financial accounting and federal tax accounting purposes, the retailer does not record the full purchase price as income at the time of the sale, even though it receives full price at that time. Rather, the taxpayer reduces its gross receipts by the amount of its estimated rebate payment (x percent of the face amount of the rebate offer). If a rebate expires, the taxpayer reverses the prior reduction from gross receipts by bringing back into income the amount of its previously estimated rebate payment. This reversing entry does not occur until several months after the expiration date, to allow for dispute resolution. If a rebate request is properly submitted, the taxpayer issues the customer a check for the full face amount of the rebate offer. When the customer cashes the check, the taxpayer reduces gross receipts by an amount equal to the difference between the face amount of the rebate offer and the taxpayer's earlier estimated rebate payment. The IRS held that this is an improper method of accounting. The taxpayer has to record the full amount of the sale price as revenue at the time of sale and can take a deduction when the rebate is paid. (For additional information see Reg. Sec. 1.461-4(g)(3).
July 1, 2008
News
If you win an award of damages in a suit, generally the amount is excludable from income only if the award is for physical injury. In Joyce M. Sanford (T.C. Memo. 2008-158) the taxpayer claimed she was sexually harassed by a U.S. Postal Service coworker. The EEOC (U.S. Equal Employment Opportunity Commission) was sexually harassed and discriminated against because of her sex. The USPS made an award that the taxpayer appealed to the EEOC. The EEOC determined that the USPS should pay petitioner a total of $115,000 in nonpecuniary damages, $33,542 in future pecuniary losses, $7,662 for medical expenses, and $14,033 for use of annual leave, sick leave and leave without pay. The taxpayer reported $43,050 of wages and $14,033 of other income on the return for 2003. She failed to report any of the income from the legal action other than the $14,033 of other income for 2003. She reported $43,086 of wages and $1,500 of income from gambling winnings on the return for 2004. Petitioner failed to report any of the income from the legal action for 2004. The Court noted that emotional distress is not treated as a personal physical injury or physical sickness except for damages not in excess of the amount paid for medical care attributable to emotional distress. The Court acknowledged that the emotional distress manifested itself in physical symptoms such as asthma, sleep deprivation, skin irritation, appetite loss, severe headaches, and depression. These physical symptoms were not the basis of the award the taxpayer received, however. She sought, and was awarded, relief for sexual harassment, discrimination based on sex, and the failure of the USPS to take appropriate corrective action. The Court held the nonpecuniary damages and future pecuniary losses awarded to petitioner as a result of the legal action were not received on account of personal physical injury or physical sickness were includable in income. The taxpayer could have excluded the amount received for past medical expenses ($7,662), but only if she had not deducted the amount. Since she failed to introduce evidence she had not deducted the amount in a prior year, and did not introduce evidence to demonstrate her costs for treating her emotional distress, the reimbursements for medical expenses were taxable. The Court also allowed the imposition of the accuracy-related penalty. While the taxpayer claimed she consulted a tax preparation service, the taxpayer was unclear in her testimony about when she received advice and what advice she received. The tax prepared did not testify. Furthermore, the taxpayer did not establish she provided the prepared with all necessary and accurate information concerning her legal action.
Tip of the Day
Good employees leave with the bad . . . It's not unusual for a company to lay off 10 or 15% of the less productive workers in a downturn, only to see another 5 to 10% of the better employees leave too. A number of reasons have been advanced, but one of the more likely ones is that the better employees figure they're next and want to get out before additional layoffs hit. Whatever the reason, be prepared to deal with this potential situation.
June 30, 2008
News
Victims of recent storms and flooding in Illinois may qualify for tax relief from the IRS. Following severe storms and flooding on June 1, the federal government declared Adams, Clark, Coles, Crawford, Cumberland, Douglas, Edgar, Hancock, Henderson, Jasper, Lake, Lawrence, Mercer and Winnebago counties a presidential disaster areas qualifying for individual assistance. As a result, the IRS is postponing until August 25 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 June 1, 2008 and August 25, 2008. In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after June 1 and on or before June 16, as long as the deposits were made by June 16. For additional information, go to www.irs.gov/newsroom/article/0,,id=184272,00.html.
In determining whether an underpayment of taxes is fraudulent, the IRS and courts at the "badges of fraud", actions that show fraudulent intent such as the concealment of assets, failure to cooperate with the IRS, etc. In Roberto and Maria L. Gigliardi (2008-1 USTC 50,363; U.S. Court of Federal Claims) the taxpayers sought a refund of fraud penalties they paid. The Court examined six factors that indicate fraud and found the IRS failed to prove the underpayment was motivated by a fraudulent intent.
Tip of the Day
Servicemembers may terminate motor vehicle lease . . . The Servicemembers Civil Relief Act (SCRA), allows a lessee on a lease described of a motor vehicle to terminate the lease at any time after (i) the lessee's entry into military service or (ii) the date of the lessee's military orders. For example, if a lessee, while in military service, executes a motor vehicle lease and thereafter receives military orders to deploy with a military unit, for a period of not less than 180 days, the lessee may terminate the lease. Under the SCRA, the rents or lease amounts unpaid for the period preceding the effective date of the lease termination must be paid on a prorated basis. However, the SCRA also specifically provides that in the case of a motor vehicle lease, a lessor may not impose an early termination charge.
June 27, 2008
News
Notice 2008-59 provides guidance on health savings accounts (HSAs) with respect to eligibility, contributions and distributions, prohibited transactions, high-deductible plans and set up procedures. The guidance is in the form of questions and answers.
Notice 2008-56 (IRB 2008-28) suspends certain requirements under Section 42 for certain low-income housing credit properties in the U. S. as a result of the devastation caused by severe storms and flooding in Indiana beginning on June 6, 2008. Notice 2008-58 (IRB 2008-28) suspends certain requirements under Section 42 for certain low-income housing credit properties in the U. S. as a result of the devastation caused by severe storms, tornadoes, and flooding in Iowa beginning on May 25, 2008.
In Steven G. Stroube et ux. (130 T.C. No. 15) the IRS moved for summary judgment on a procedural issue as to whether taxpayers' allegation that a fraud on the Tax Court occurred during the trial of a tax shelter tax deficiency test case may be raised in this collection case under sec. 6320. The taxpayers filed a cross-motion for partial summary judgment on this same procedural issue. The Court held that the typical and proper method to raise an allegation that a fraud on this Court occurred during the trial of a tax deficiency case is by filing a motion to vacate the decision entered in the specific tax deficiency case in which the alleged fraud occurred. The Court further held if other tax deficiency cases (or TEFRA partnership cases) have been filed that are related to and controlled by a test case in which a fraud allegedly occurred, there also may be situations in which the alleged fraud may be raised by filing a motion under Rule 162, Tax Court Rules of Practice and Procedure, to vacate decisions entered in one or more of the related tax deficiency (or TEFRA partnership) cases. Finally, the Court held that in this collection case under Sec. 6320, however, the taxpayers may not raise an issue of whether a fraud on the Court occurred in an income tax deficiency case.
It appears the housing stimulus bill will be delayed until after the Independence Day recess of Congress.
Notice 2008-60 (IRB 2008-30) provides interim guidance, pending the issuance of regulations, regarding the tax credit under Sec. 45 for electricity produced from certain renewable resources. This notice modifies Notice 2006-88, which set forth interim guidance regarding the tax credit under Sec. 45 for electricity produced from open-loop biomass. This notice supersedes Notice 2006-88, by republishing the guidance contained in that notice with the following modifications: (1) the guidance relating to the simultaneous sale and purchase of electricity is not included; and (2) the guidance is modified to reflect legislative changes since Notice 2006-88 was published. The Service will continue the no rule policy announced in Section 3.05 of Notice 2006-88.
Tip of the Day
Felony tax evasion . . . Take a few charitable contributions on your personal return you don't have documentation for and the IRS or state will want the tax, penalties and interest. Underreport your sales for state sales tax purposes, fail to report income or take deductions for personal expenditures on your business income tax return and you could face much more than taxes and penalties. The IRS appears to be getting more aggressive in prosecuting criminal tax charges. So are many states. In addition to hefty fines, both the IRS and states are asking the courts for jail time. That could also mean the demise of your business.
June 26, 2008
News
The housing stimulus bill appears to be held up in the Senate on procedural issues. The Alternative Minimum Tax Relief Act of 2008 has been passed by the House. The bill would increase the exemption amount for 2008. However, President Bush has announced he will veto the bill because it contains tax increases and repeals certain oil and gas industry tax benefits.
Victims of recent storms and flooding in Nebraska may qualify for tax relief. Following severe storms, tornadoes, and flooding on May 22, the federal government declared Buffalo, Butler, Colfax, Dawson, Douglas, Gage, Hamilton, Jefferson, Kearney, Platte, Richardson, Sarpy and Saunders counties a presidential disaster areas qualifying for individual assistance. As a result, the IRS is postponing until August 19 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 22, 2008 and August 19, 2008. In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after May 22 and on or before June 6, as long as the deposits were made by June 6. For further information, go to www.irs.gov/newsroom/article/0,,id=184198,00.html.
Victims of recent storms and flooding in West Virginia may also qualify for tax relief. Following severe storms, tornadoes, mudslides, landslides and flooding on June 3, the federal government declared Barbour, Doddridge, Gilmer, Harrison, Jackson, Jefferson, Marion, Taylor and Tyler counties a presidential disaster areas qualifying for individual assistance. As a result, the IRS is postponing until August 18 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 June 3, 2008 and August 18, 2008. In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after June 3 and on or before Aug. 18, as long as the deposits were made by Aug. 18. For further information, go to www.irs.gov/newsroom/article/0,,id=184184,00.html.
Revenue Procedure 2008-43 (IRB 2008-30) announces that the Service generally will view a rolling-average method of valuing inventories for financial accounting purposes as clearly reflecting income for federal income tax purposes. The revenue procedure provides two safe harbor under which a taxpayer’s rolling average method is deemed to clearly reflect income.
Tip of the Day
Renting your former principal residence? . . . Many homeowners are finding that they can't sell their former residence. They've relocated, but are now stuck with an extra house. Renting that house until the market improves may be one option. However, keep in mind that if you'll have a gain on the sale, your $250,000 ($500,000 for married filing joint) exclusion will only apply if you meet the 2 out of 5 year test. You must have owned the house and used it as your principal residence for 2 out of the last 5 years. Thus, no matter how long you've owned the house, you'll fail the test if you rent it (or haven't used it as your principal residence) for more than 3 years immediately before the sale. In some cases that can be a deal breaker. For example, you bought your house in 1980 and you've got a $450,000 capital gain. You don't want to jeopardize that. The taxes on the gain could easily be $90,000 between federal and state. On the other hand, if your gain is much smaller, say $100,000, generating net rental income of maybe $12,000 a year after taxes would more than offset $20,000 in capital gains taxes. Work through the numbers with your accountant.
June 25, 2008
News
The IRS has issued final (T.D. 9402) and temporary (REG-102122-08) regulations under Section 956 relating to the determination of basis in property acquired by a controlled foreign corporation in certain nonrecognition transactions that are intended to avoid United States income tax. Those regulations affect United States shareholders of a controlled foreign corporation that acquires United States property in certain nonrecognition transactions.
Any responsible person in an organization can be liable for the trust fund recovery penalty if employment taxes are not deposited. In Ronald C. Savona (2008-1 USTC 50,342; U.S. District Court, So. Dist. Calif.) the Court found the IRS had shown the executive knew the tax liabilities weren't being paid. However, the Court noted that it was not shown that he paid other creditors ahead of the IRS. The fact that the executive was a responsible person did not, by itself, establish that he voluntarily, consciously, and intentionally acted to prefer other creditors and withheld payments from the IRS.
Tip of the Day
Gas prices making you drive less? . . . Talk to your insurance company. Most insurers give a discount for low mileage cars. One company we know of has a 7,500 mile threshold. If you drive less than that for the year, you're entitled to a significant discount. How much? Obviously it varies, but it's enough to look into. There may be other changes in your driving pattern (only commuting 4 days per week), the drivers in your family (your son moved away), etc. Talk to your agent or insurer.
June 24, 2008
News
The IRS has announced that the standard mileage rate for business and medical and moving purposes will increase by 8 cents per mile for the second half of 2008. Thus, the rate for business purposes will increase from 50.5 cents per mile on July 1 to 58.5 cents; for medical and moving purposes it will increase from 19 cents per mile to 27 cents. For more details, please see our article in the Special Reports section.
The IRS has issued final regulations (T.D. 9403) that provide guidance under Section 664 on the tax effect of unrelated business taxable income (UBTI) on charitable remainder trusts. The regulations reflect the changes made to Section 664(c) by Section 424(a) and (b) of the Tax Relief and Health Care Act of 2006. The regulations affect charitable remainder trusts that have UBTI in taxable years beginning after December 31, 2006.
Tip of the Day
Check disaster declarations regularly . . . The IRS provides special relief to victims of disasters such as the flooding in the Mid-West, hurricanes, etc. The relief can include postponed deadlines for filing returns, waiving of failure to deposit tax penalties, etc. We frequently announce them in our News section. But no service gives the comprehensive coverage the IRS does. Relief is often provided to victims of disasters that don't receive much attention from the media. And the IRS frequently adds counties eligible for relief to those listed in the original declaration. We suggest checking two Web sites regularly--www.irs.gov/newsroom/article/0,,id=108362,00.html and www.irs.gov/newsroom/article/0,,id=98936,00.html. Both are included in our IRS Quick Links section on our home page.
June 23, 2008
News
Gross income generally includes income from the forgiveness of debt. One exception is that, in the case of an individual, gross income does not include any amount which would be includible in income by reason of the discharge of any student loan if the discharge is pursuant to a provision of the loan that the debt would be discharged if the individual works for a certain period of time in certain professions for a broad class of employers. Revenue Ruling 2008-34 (IRB 2008-28) clarifies that a law school loan made under a Loan Repayment Assistance Program generally satisfies the requirements of Section 108(f)(1) and is a “student loan” within the meaning of Section 108(f)(2). Thus, the forgiveness of such a loan is not includible in gross income.
The IRS has issued proposed regulations (REG-100464-08) providing guidance on the application of the accrual rule for defined benefit plans under Section 411(b)(1)(B) in cases where plan benefits are determined on the basis of the greatest of two or more separate formulas. These regulations would affect sponsors, administrators, participants, and beneficiaries of defined benefit plans.
If your employer provides your meals and lodging the value may be excludable from your income but the meals and lodging must:
For example, you work for communications company and have to monitor and service equipment at a remote location. You must live at the site since you're on call 24 hours a day, one week on and one week off. The company provides you with sleeping accommodations and food. Under Section 119 you can exclude the value of the meals and lodging from your income. In Patricia M. Middleton (T.C. Memo. 2008-150) the taxpayer claimed the exclusion. The Tax Court sided with the IRS in denying the exclusion. It noted that the company paid for her lodging in a town some 20 miles from her employer's facility. The Court noted that the taxpayer's assigned housing was (1) not located within the physical boundaries of her employer's facility, (2) not in a separately gated community, and (3) not in an area or enclave segregated for employees of the company and unavailable to the general public. Nor was any company business conducted at her residence.
Tip of the Day
Make customer pay for overnight delivery . . . The cost of shipping has gone up and is unlikely to reverse course any time soon. Most businesses are under pressure from rising costs on a number of fronts. If you're shipping items overnight on a regular basis and picking up all the cost, consider other options. For example, make 2nd day air or ground delivery standard and charge for next day service. You'll probably be surprised how many customers really don't need it tomorrow if they have to pay extra. And those that do may plan ahead next time. You might try other variations. Instead of charging the full additional cost for next day, just add a surcharge. For example, a 2-pound package from New York to Florida sent 2nd day, could cost $19.46; overnight standard delivery is $45.50. That's $26.04 extra. You might add a flat $15. For regular customers you might provide 2nd day free plus five free upgrades to overnight during the year. After that, they pay the additional charge for overnight. As usual, there's no one answer that will cover all businesses.
June 20, 2008
News
The House Ways and Means Committee has passed a one-year alternative minimum tax patch. The stop-gap measure raises the 2008 AMT exemption amount to $69,950 for married couples filing jointly, to $46,300 for single individuals, and to $34,975 for those filing married separate. The cost of the increased exemption would be offset by several tax increases and a measure requiring information reporting for credit card, debit card, and third party payment transactions beginning in calendar year 2011.
The IRS has announced (IR-2008-080) a new summer campaign to reach those retirees and disabled veterans who qualify for the economic stimulus payment but have not filed to claim it. New statistics released today indicate about 74 percent in this group are accounted for in the stimulus payments currently being sent, leaving about 5.2 million potential recipients remaining.
Notice 2008-57 (IRB 2008-28) designates the China earthquake occurring in May 2008 as a qualified disaster for purposes of Section 139 of the Internal Revenue Code. This notice enables employer-sponsored private foundations to assist certain victims in areas affected by the earthquake.
Following votes in the House and Senate overriding President Bush's veto, the Food, Conservation, and Energy Act of 2008 (a.k.a. the farm bill) is now officially law.
The IRS announced (IR-2008-081) that it will waive certain limitations for the low-income housing tax credit in Indiana and Iowa so that owners of facilities in these states can provide housing to victims of recent storms and flooding.
Tip of the Day
S corporation changes . . . The House Small Business Finance and Tax Subcommittee is looking into changes for S corporations. The one most frequently mentioned is a shortening of the holding period for assets from a converted C corporation that are subject to the built-in gains tax. Under current rules, if a C corporation elects S status and sells an asset held less than 10 years from the conversion date at a gain, the gain is subject to a special tax.
June 19, 2008
News
On Nov. 24, 2000, the taxpayer (Judith A. Barnes; 130 T.C. No. 14) filed a request for equitable relief from joint and several liability with respect to her and her ex-spouse's 1997 tax underpayment. On Sept. 13, 2001, the IRS issued a final notice of determination, denying the requested relief. On Mar. 7, 2007, she filed a second request for equitable relief with respect to the same underpayment, providing more detailed factual allegations and alleging that in 2002 her ex-husband and his business associate had been convicted of criminal securities fraud. By letter dated May 1, 2007, the IRS declined to reconsider its original denial of relief. On July 22, 2007, the taxpayer filed her petition in this Court. The IRS filed a motion to dismiss for lack of jurisdiction. Subsequently, the taxpayer filed motions to enjoin collection, on the ground that the Service had improperly levied upon her property during the pendency of this proceeding. The Court held that the taxpayer's second claim for relief was essentially duplicative of her first claim for relief and was not a qualifying request for relief pursuant to Sec. 1.6015-1(h)(5). The Court also found it lacked jurisdiction under Sec. 6015(e)(1)(A) because the taxpayer failed to petition the Court within 90 days of the Sept. 13, 2001, final notice of determination. Finally, the Court held it lacked jurisdiction under Sec. 6015(e)(1)(B)(ii) to enjoin the IRS's collection action.
The Senate is getting close to an agreement on a stimulus package for housing. The most significant benefit is a tax credit equal to 10% of the cost of a home (but no more than $8,000) that would be recouped over a number of years. The credit would be phased out for taxpayers with AGI in excess of 150,000 for joint filers.
The IRS has announced the Applicable Federal Rates (AFR) for July, 2008. The rates are up from the June rates, which were higher than the May ones. The short-term rate is now 2.42%, up from 1.64% in May. The blended annual rate for 2008 is 2.80%, considerably less than the 2007 rate of 4.92%. For the IRS Rev. Rul. with the complete rates, go to www.irs.gov/pub/irs-drop/rr-08-33.pdf.
REG-101258-08 contains proposed amendments providing guidance under Section 642(c) with regard to the Federal tax consequences of an ordering provision in a trust, a will, or a provision of local law that attempts to determine the tax character of the amounts paid to a charitable beneficiary of the trust or estate. The proposed regulations also make conforming amendments to the regulations under Section 643(a)(5). The proposed regulations affect estates, charitable lead trusts (CLTs) and other trusts making payments or permanently setting aside amounts for a charitable purpose.
President Bush has signed into law the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008.
Tip of the Day
Noncompete agreement . . . If you're selling your business, more than likely you'll be asked to sign a noncompete agreement. Generally, there's nothing wrong with that. However, you should make it conditional on the buyer fulfilling his side of the deal. For example, if he defaults on the payments on a note, the noncompete becomes voidable.
June 18, 2008
News
Victims of recent severe storms, tornadoes and flooding in Wisconsin may qualify for tax relief from the IRS. Following severe storms and tornadoes on June 5, the federal government declared Crawford, Columbia, Sauk, Milwaukee and Vernon counties a presidential disaster area qualifying for individual assistance. As a result, the IRS is postponing until Aug. 13 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 June 5 and Aug. 13. In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after June 5 and on or before June 20, as long as the deposits were made by June 20. 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, from May 30 to Aug 7. For more information go to the IRS Web page at www.irs.gov/newsroom/article/0,,id=184000,00.html.
The IRS has proposed regulations (REG-129243-07) implementing amendments to the tax return preparer penalties under Sections 6694 and 6695 and related provisions under Sections 6060, 6107, 6109, 6696, and 7701(a)(36) reflecting amendments to the Code made by Section 8246 of the Small Business and Work Opportunity Tax Act of 2007. The proposed regulations affect tax return preparers and provide guidance regarding the amended provisions. In accordance with the 2007 Act, the proposed regulations amend existing regulations defining income tax return preparers to broaden the scope of that definition to include preparers of estate, gift, and generation-skipping transfer tax returns, employment tax returns, excise tax returns, and returns of exempt organizations. The proposed regulations also revise current regulations to amend the standards of conduct that must be met to avoid imposition of the tax return preparer penalty under Section 6694. In addition, these proposed regulations reflect changes to the computation of the Section 6694 tax return preparer penalty made by the 2007 Act. These regulations also amend current regulations under the penalty provisions of Section 6695 to conform them with changes made by the 2007 Act expanding the scope of that statute beyond income tax returns. The IRS intends to finalize these proposed regulations by the end of 2008, with the expectation that the final regulations will be applicable to returns and claims for refund filed (and advice given) after the date that final regulations are published in the Federal Register, but in no event sooner than December 31, 2008.
Tip of the Day
Buying a foreclosure? . . . Sounds like a steal. Buy a house in foreclosure for $50,000 and sell it two weeks later for $400,000? Before spending your profits consider:
Despite a number of negatives, there's still a good chance you can make a substantial return on your investment in a short period of time, but proceed with caution.
June 17, 2008
News
Victims of recent severe storms, floods and tornadoes in Indiana may qualify for tax relief from the IRS. Following severe storms and tornadoes on May 30, the federal government declared Adams, Bartholomew, Brown, Clay, Daviess, Dearborn, Decatur, Greene, Hamilton, Hancock, Henry, Jackson, Jennings, Johnson, Knox, Marion, Monroe, Morgan, Owen, Parke, Putnam, Randolph, Rush, Shelby, Sullivan, Vermillion,Vigo and Wayne counties a presidential disaster area qualifying for individual assistance. As a result, the IRS is postponing until Aug. 7 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 30 and Aug. 7. In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after May 30 and on or before June 16, as long as the deposits were made by June 16. For more information go to the IRS Web page at www.irs.gov/newsroom/article/0,,id=183929,00.html.
The IRS has issued final, temporary (T.D. 9401) and proposed (REG-149405-07) regulations relating to the election and calculation of the alternative simplified credit under Section 41(c)(5). The regulations implement changes to the credit for increasing research activities under Section 41 made by the Tax Relief and Health Care Act of 2006 and will affect certain taxpayers claiming the Section 41 credit.
Tip of the Day
Mortgage rates increase . . . Based on one measure of 30-year fixed rate mortgages (not jumbos), the interest rate has actually increased in the past week. Some other lending rates have also increased. Should you rush to close on a new home? The new rate is 6.41%, up from 6.19%. That translates into a $14.30 per month increase on a $100,000 loan, or $172.08 per year ($516.24 on a $300,000 loan). That's not a huge amount, and it's before factoring in any tax benefits. While the debt service difference may or may not be significant in absolute terms, it seems pretty small when you're considering the cost of the home. That is, if you can save $5,000 on the price of the house by waiting (or moving faster), that could be equivalent to many years of mortgage savings. Predicting where home prices and mortgage rates are going is tricky. Keep things in perspective.
June 16, 2008
News
In Viking Security Services, Inc. (2008-1 USTC 50,339; U.S. District Court, Mid. Dist. Fla., Orlando Div.) the taxpayer sought to enjoin the IRS from levying on the company's bank accounts, accounts receivable and assets. The taxpayer alleged that the IRS levied on the property in the belief that Viking Security was an alter ego of Viking Protective Group, Inc. a company which Viking Security purchased. The taxpayer argued that the levies would make it impossible for it to conduct its daily operations and pay its regular bills, and suffered irreparable damage. The Court noted that if a levy or sale would irreparably injure rights in property, it may grant an injunction to prohibit the enforcement of the levy. The Court held the taxpayer failed to identify an irreparable harm. The taxpayer alleged that the levy would prevent it from paying its employees and otherwise function as a business. Section 7426(b)(1) does not provide relief in this case. The Court denied the taxpayer's request for a temporary restraining order against the IRS.
Notice 2008-55 (IRB 2008-27) provides guidance regarding the effect of adding certain liquidity facilities to support certain auction rate preferred stock on the equity character of the stock for Federal income tax purposes. This Notice provides administrative relief in furtherance of public policy in light of special liquidity needs in the auction rate securities market as a result of recent significant auction failures in this market.
Tip of the Day
Adjusting your withholding for house sale . . . If you're downsizing your home, moving into your vacation home, or going to rent while you're between homes, your tax bill could increase substantially. How much? It'll depend on your deductions for mortgage interest and real estate taxes and on your tax bracket. But if you're in the 28% bracket (taxable income $131,450 to $200,300 for a married couple filing jointly) and your interest and real estate taxes total $20,000, your tax liability for the full year could be up by $5,600. The additional liability will be higher if you're in a higher bracket and/or had larger deductions; lower if you're in a lower bracket and/or had less deductions. You may not have an underpayment penalty for the year of the sale, but you may be liable for one in the year following the sale. Warn your tax advisor that your deductions will be lower so that he or she can adjust your estimated payments or withholdings.
June 13, 2008
News
Congress is revisiting the housing tax incentives legislation we discussed some months ago. It's possible a bill will be agreed upon before the July 4th recess.
You have only a limited time to file a refund claim or amended return or to recover an overpayment of estimated taxes made for the year. Generally the time limit is three years from the date the return was filed. In Alternative Entertainment Enterprises, Inc. (2008-1 USTC 50,330; U.S. Court of Appeals, 6th Circuit) the taxpayer filed its tax returns for the fiscal year ended June 30, 1999 and June 30, 2000 in April 2004, seeking refunds of estimated taxes paid before the end of each of those fiscal years. The taxpayer had a valid 6-month extension for the 1999 return, but not for the 2000 return. The IRS denied the claims for the refunds because the payments were made outside the look-back period. The Court noted the refund with respect to each claim may not exceed the portion of the tax paid within the look-back period. Counting backward from the filing of the claims in April 2004, the taxpayer could recover, at most, the amount of overpayments for fiscal 1999 made after October 2000, and the amount of overpayments for fiscal 2000 made after April 2001. Thus, the taxpayer was not entitled to a refund of the estimated taxes it paid.
Tip of the Day
Minimum wage to increase . . . Be prepared. The federal minimum wage increases to $6.55 an hour on July 24, 2008. That may still be less than the minimum wage in the states you do business in. The U.S. Department of Labor has an interactive site that lists the minimum wage, planned increases and the hours threshold for premium pay for all the states. Go to www.dol.gov/esa/minwage/america.htm and click on the state you're interested in.
June 12, 2008
News
Like other debts, your tax liabilities can be discharged in bankruptcy. In In re Joanne M. Cushing (2008-1 USTC 50,322; U.S. Bankruptcy Court, Dist. Mass.) the IRS claimed that the taxpayer's failure to comply with the requirement to file her federal income tax return no later than the day before the first scheduled meeting of creditors warranted dismissal of her Chapter 13 case. The taxpayer asked the Court to deny the IRS motion because prior to the petition date she obtained an automatic six-month extension of time within which to file her return. As a result the government should be equitably estopped from pursuing dismissal of her Chapter 13 case. The Court noted the taxpayer filed a timely extension request and properly estimated her income tax liability. The Court sided with the taxpayer, denying the IRS motion.
The proposed crude oil windfall profit tax bill and the tax extenders and energy tax incentives have not garnered enough votes to advance in the Senate.
Tip of the Day
Billable time . . . That's been the watchword in law and accounting firms for many years. While it may be a more critical measurement in these professions, it can be used as a performance measure in many other businesses. If your employees are not breaking down their time by job because of flat rating or if you just don't accumulate the hours in a fashion that you can analyze them, consider doing so. The statistic is easy to calculate--billable hours divided by total hours worked. Then track the hours by day, week, month, etc. It's not the absolute number, but the trend and comparisons that are important. Then find out why there's a difference--either positive or negative, and take appropriate measures to improve the trend.
June 11, 2008
News
Generally, you can only deduct gambling losses only up to the amount of your winnings. You must report your winnings as other income on the front of your Form 1040 and can deduct the losses on Schedule A. If you can show you're in the trade or business of gambling, that is, you're a professional, you report the winnings and losses and associated expenses on Schedule C. But the IRS doesn't easily accept a taxpayer's claim of professional gambling. In Michael N. Merkin et ux. (T.C. Memo. 2008-146) the taxpayer was a psychiatrist who claimed his video poker activity was a trade or business. He reported some $691,000 of winnings for the year at issue along with about $710,000 of losses. While he spent considerable time at the activity, the Court noted that he relied on the casino's records of his activity, and did not keep his own records. In addition, the Court noted the time spent at the activity (based on its calculation) was relatively minor. The Court found the taxpayer was not in the trade or business of gambling.
Announcement 2008-56 (IRB 2008-26) states that beginning with distributions in 2009, the reporting of dividends on employer securities that are distributed from an employee stock ownership plan under section 404(k) of the Code must be on a Form 1099-R that does not report any other distributions.
The IRS has released Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals).
Tip of the Day
Focus on product or service, not price . . . If you're sending or e-mailing newsletters or other information to customers, try to focus on providing valuable information on products or services rather than offering a myriad of discounts. While a one-time discount, free offer, etc. can be used to generate attention or close the deal, too much discounting can lower the perceived price and value of your product, while information can bring customer loyalty.
June 10, 2008
News
The IRS has issued proposed regulations (REG-106897-08) relating to qualified nonpersonal use vehicles as defined in Section 274(i). Qualified nonpersonal use vehicles are excepted from the substantiation requirements of Section 274(d)(4) that apply to listed property as defined in Section 280F(d)(4). These proposed regulations would add clearly marked public safety officer vehicles as a new type of qualified nonpersonal use vehicles. These proposed regulations would affect employers that provide their employees with qualified nonpersonal use vehicles and the employees who use such vehicles.
proposed regulations (REG-143716-04) under Section 7477 regarding petitions filed with the United States Tax Court for declaratory judgments as to the valuation of gifts. Changes to the applicable law were made by Section 506(c)(1) of the Taxpayer Relief Act of 1997 (TRA). The proposed regulations primarily affect individuals who are donors of gifts. The proposed regulations provide rules for determining whether a donor may petition the Tax Court with respect to the value of a gift, including guidance regarding the definition of "exhaustion of administrative remedies."
Looking for a reward from the IRS for informing on someone? The IRS isn't throwing reward money away. In Arthur H. Krupnick (2008-1 USTC 50,301; U.S. Court of Federal Claims) the taxpayer sought a reward allegedly promised by IRS agents. However, in order to sue for the money, the plaintiff had to show a contract existed. The IRS pointed out that no date for the alleged contract was indicated in the plaintiff's complaint. The Court also noted that no specific amount was promised and the agents did not have the authority to approve such an award. The Court found no contract existed.
Tip of the Day
Avoid express shipments . . . They're expensive and almost assuredly going to be even more so in the future. A last-minute check sent by an overnight service is costly; plan ahead to send it regular mail. Same goes for documents where only the original will work. Otherwise, send documents electronically as PDF files rather than overnight.
June 9, 2008
News
In Salvatore Munaco (2008-1 USTC 50,298; U.S. Court of Appeals, 6th Circuit) the plaintiff paid the government some $326,000 to satisfy a federal tax lien placed on real property he owned. Believing that the lien was invalid, he sued for a refund in federal District Court. Unfortunately, the District Court ruled correctly that it lacked jurisdiction because the United States is immune from suit. Even more unfortunately, the plaintiff's failure to pursue the prescribed statutory remedies available to a person in his position meant that he has no further remedy available to him. The Court of Appeals affirmed the District Court's dismissal of the plaintiff's claim for lack of subject-matter jurisdiction.
Tip of the Day
Energy audits . . . Energy audits have been available from independent contractors, utilities, state and local agencies, etc. for some time. In the past you might have dismissed them as not particularly cost effective. It's time to take a new look. Even if your bills haven't increased much, future increases are almost sure to be larger for both businesses and individuals. Even if you hire your own auditor, you should quickly recoup the cost. But there are better deals out there. Many utilities and state and local agencies will subsidize the cost. That's true for both individuals and businesses.
June 6, 2008
News
Discharge of debts in bankruptcy isn't automatic. In Letantia Bussell et al. (130 T.C. No. 13) the IRs assessed income tax deficiencies along with interest and penalties against the taxpayer and her husband. The IRS filed notices of Federal tax lien in California and Utah. In 1995 the taxpayer and her husband filed a bankruptcy petition under ch. 7 of the Bankruptcy Code. The bankruptcy court issued a discharge order in the bankruptcy case later that year. In 2000 the taxpayer and her husband were indicted and charged with various violations associated with bankruptcy fraud. In February 2002 the husband died. The taxpayer was convicted of, among other crimes, attempted evasion of payment of their unpaid tax liabilities in violation of Sec. 7201. In April 2002 the IRS determined that (1) the taxpayers' unpaid tax liabilities were excepted from discharge in bankruptcy because the taxpayer was convicted of attempted evasion of payment of their unpaid tax liabilities, and (2) collection of the taxpayers' unpaid tax liabilities would be jeopardized by delay. The IRS served jeopardy levies and collected amounts that were applied to the taxpayers' unpaid tax liabilities. The IRS subsequently issued to the taxpayers a notice of the jeopardy levies pursuant to Secs. 6330 and 7429. The taxpayers requested and received an Appeals Office hearing under Sec. 6330. In March 2004 the IRS sent the taxpayers a notice of determination upholding the decision to proceed with the jeopardy levies. The taxpayers petitioned the Court to review the IRS's determination. The Court found the IRS did not abuse its discretion in determining that (1) the taxpayers' unpaid tax liabilities were excepted from discharge in bankruptcy by reason of the taxpayer's conviction for attempted evasion of payment of unpaid tax liabilities and that (2) it was appropriate to proceed with collection by serving the jeopardy levies in dispute. The Court also found that although the taxpayers received a discharge and were relieved of personal (in personam) liability for the penalties and related interest that the IRS assessed for the years in issue, the liens that the IRS filed before the taxpayers filed for bankruptcy attached to certain of their assets, survived the bankruptcy proceeding, and enabled the IRS to collect the penalties and interest by an action against the taxpayers in rem.
Tip of the Day
Tapping retirement plans for cash . . . It's rarely a good idea. Why? Because it's expensive money. Unless you're hitting a Roth or a nondeductible IRA (there are special rules if you have both a nondeductible IRA and a deductible one) more than likely the entire distribution will be subject to the tax at ordinary income rates. Moreover, unless your other income for the year is down, a substantial distribution could put you in a higher tax bracket or otherwise increase your liability as a result of phaseouts, alternative minimum tax, etc. Finally, unless you meet one of the exceptions, you'll owe a 10% penalty on the distribution. There may be some relief coming for the last item. Congress has been allowing more exceptions in recent years. And there's a good chance that, because of the current financial situation for many taxpayers, they'll write some additional exceptions into the law before year end. From that standpoint, and for general tax planning reasons, try to hold out for as late into the year as you can.
June 5, 2008
News
The IRS has announced that victims of recent severe storms and tornadoes in Mississippi may qualify for tax relief from the IRS. Following severe storms and tornadoes on April 4, the federal government declared Hinds county a presidential disaster area qualifying for individual assistance. As a result, the IRS is postponing until July 28 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 4 and July 28. Go to the IRS Web site at www.irs.gov/newsroom/article/0,,id=108362,00.html for more information.
In Thomas H. Holman Jr. et ux (130 T.C. No. 12) the taxpayers transferred stock of substantial value to a newly formed family limited partnership and then made gifts of limited partnership units (LP units) to a custodian for one of their children and in trust for the benefit of all of their children. The taxpayers made a large gift in 1999 and smaller gifts in 2000 and 2001. In valuing the gifts for Federal gift tax purposes, they applied substantial discounts for minority interest status and lack of marketability. With respect to the 1999 gift, the IRS argued that the gift should be treated as an indirect gift of shares and not as a direct gift of LP units. For all of the gifts treated as gifts of LP units, the IRS argued that the restrictions in the partnership agreement on a limited partner's right to transfer her interest should be disregarded pursuant to Sec. 2703(a)(2). The IRS also disagreed with the taxpayers' application of discounts. The Court held that the limited partnership was formed and the shares of stock were transferred to it almost 1 week in advance of the 1999 gift, so that, on the facts before the Court, the transfer could not be viewed as an indirect gift of the shares to the donees under Sec. 25.25111(a) and (h)(1). The Court further held that the 1999 gift could not be viewed as an indirect gift of the shares to the donees under the step transaction doctrine. Finally, the Court held that in valuing the gifts, the transfer restrictions are disregarded pursuant to Sec. 2703(a)(2).
Section 307 of the Health Opportunity Patient Empowerment Act of 2006 (the Act) added Sec. 408(d)(9) to the Code. Notice 2008-51 (IRB 2008-25) provides guidance on a qualified HSA funding distribution from an individual's Individual Retirement Account (IRA) or Roth IRA to a Health Savings Account (HSA). The qualified HSA funding distribution is a one-time transfer from an individual's IRA to his or her HSA and generally excluded from gross income and is not subject to the 10 percent additional tax under Sec. 72(t).
Notice 2008-52 (IRB 2008-25) provides guidance on contributions to Health Savings Accounts (HSAs) under amendments to the Code by Secs. 303 and 305 of the Health Opportunity Patient Empowerment Act of 2006 included in the Tax Relief and Health Care Act of 2006.
Tip of the Day
Considering a new vehicle for your business? . . . This would be a good year to do it. Normally, the maximum depreciation or Section 179 deduction you can take in the year of purchase is limited. For 2008 it would be $2,960 for autos and $3,160 for trucks. However, for 2008, you can take a deduction of up to $10,960 (cars) or $11,160 (trucks) for new vehicles that qualify for the 50% bonus depreciation. (The lower amounts cited above apply to used vehicles in 2008.) That's a big up-front deduction that can help your cash flow by reducing your taxes for 2008. Keep in mind that only new vehicles qualify.
June 4, 2008
News
In a legal memorandum (ILM 200822026) the IRS held that in employment tax cases where worker classification issues are present, revenue officers have authority under IRC Sec. 6020(b) to prepare employment tax returns, but the requirements of Sec. 7436 must be met prior to assessment.
According to the IRS there is a growing trend among taxpayers, and their representatives, to submit prepackaged material to support research credit claims. These submissions are usually delivered to examiners in multiple binders. While the submissions often set forth the methodology employed in preparing the research credit claim, the submissions frequently fail to substantiate that the taxpayer paid or incurred qualified research expenses ("QREs") as claimed. In addition, audits may have been restricted to evaluating the taxpayer's methodology for capturing QREs found in the prepackaged submission, as opposed to examining the research credit claimed on the amended return. To help agents in their examination, the IRS has issued an audit technique guide "Research Credit Claims Audit Techniques Guide (RCCATG): Credit for Increasing Research Activities Sec. 41".
While it's best to get it in writing, an oral agreement can be legally binding. In FPL Group Inc. (T.C. Memo. 2008-144) the Court noted in a civil controversy, a valid settlement, once reached, cannot be repudiated by either party, and after the parties have entered into a binding settlement agreement, the actual merits of the settled controversy are without consequence. A settlement is a contract and, consequently, general principles of contract law determine whether a settlement has been reached. In a tax case, it is not necessary that the parties execute a closing agreement under Section 7121 in order to settle a case pending before this Court, but, rather, a settlement agreement may be reached through offer and acceptance made by letter, or even in the absence of a writing. The taxpayer argued that the IRS orally accepted the taxpayer's settlement proposal. As the moving party, the taxpayer had the burden of proof. The Court held it did not meet that burden and, after considering the entire record in the matter, the Court found that the evidence is insufficient for it to conclude that the parties entered into a binding agreement.
Tip of the Day
The cost of disappointing a customer? . . . It could be very high. One study found that 25% of customers dissatisfied with a product won't buy that brand again. The impact to your business will depend on a number of factors. If you're the only marina on the lake, it probably won't make much difference. Sometimes there's little or nothing you can do to please a customer. The item promised wasn't shipped by the distributor, an outdated unit can't be fixed, etc. But if you can control the outcome, you should take all reasonable steps to do so. Replacing a lost customer can be expensive. Worse yet, a dissatisfied customer may talk about his bad experience to his friends. That can cost you much more than the original customer.
June 3, 2008
News
The IRS has announced in Rev. Rul. 2008-27 (IRB 2008-26) the interest rates on under- and overpayments for the third quarter of 2008. The rates are down by one percentage point. For individuals, the interest rate on under- and overpayments will be 5%.
In Donald Wayne Eastman (2008-1 USTC 50,294; U.S. District Court, West. Dist. Ark., El Dorado Div.) the Court denied the taxpayer damages against the IRS for failing to release a lien. The Court noted that the original notice of lien stated that unless it was refiled by November 1, 2005 (10 years after the issue date), the notice would on the day following that date, operated as a certificate of release. On October 3, 2005, the lien documents self released and the notice of federal tax lien was not refiled by the IRS.
Tip of the Day
Mismatched W-2 and 941 information . . . The Combined Annual Wage Reporting (CAWR) is a document matching program that compares the Federal Income Tax (FIT) withheld, advance Earned Income Credit (AEIC), Medicare wages, Social Security wages, and Social Security Tips reported to the IRS on the Forms 94X and Schedule H against the amounts reported to SSA via Forms W-3 and the processed totals of the Forms W-2. When the Social Security and/or Medicare Wages reported to SSA on Forms W-2 are lower than the Social Security and/or Medicare Wages reported to IRS on Forms 94X/Schedule H, the Social Security Administration will contact you. The IRS has a Web page www.irs.gov/businesses/small/article/0,,id=182835,00.html with information on how to prepare your response to questionnaires from the SSA or the IRS.
June 2, 2008
News
The IRS has announced that victims of recent severe storms and tornadoes in Colorado may qualify for tax relief from the IRS. Following severe storms and tornadoes on May 22, the federal government declared Larimer and Weld counties a presidential disaster area qualifying for individual assistance. As a result, the IRS is postponing until July 25 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 22 and July 25. Relief is also available to victims of recent sever storms, tornadoes and floods in Iowa. Go to the IRS Web site at www.irs.gov/newsroom/article/0,,id=108362,00.html for more information.
In David Jahn (T.C. Memo. 2008-141) the taxpayer argued that he was entitled to itemized deductions relating to the tax return at issue. The Court noted that a taxpayer must file a return in order to elect to itemize deductions. Here, the taxpayer failed to file a return and the IRS filed a substitute for a return for the taxpayer. The Court held the taxpayer was not entitled to itemize and sustained the IRS's determination relating to the deficiency.
Tip of the Day
Read the fine print . . . Why would one health insurance policy cost only about 1/5 of another? It probably doesn't have anything to do with cost savings. More than likely the policy has less benefits. There are a number of policies being sold to small business owners and uninsured individuals that have low premiums, often a fraction of other policies. Chances are the fine print contains major restrictions. It could be a cap on benefits of $30,000 in a year, a two-year wait on preexisting conditions, etc. The policy may contain such restrictions as to be virtually valueless. A $30,000 cap sounds high--until you spend a few nights in a hospital, have a broken leg, or need extensive tests. Read the policy. If you don't have the time to do so in detail, at least look for dollar amounts that might signal caps, a list of restrictions, etc. And don't assume that because you purchased the policy from a company with a recognized name you don't have to worry. Many quality companies have low-end policies. Use the same caution on other policies, such as travel insurance, homeowners, etc. For many individuals, a high deductible policy is a smarter way to lower your premium. Paying the first $5,000 of medical expenses out of your own pocket may hurt, but it's unlikely to have the same impact as trying to pay off a $60,000 or $100,000 (or more) bill.
Copyright 2008 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