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September 2, 2010
News
When it comes to paying the IRS, only a check, bank transfer or credit card will do. In Lisa S. Goff (135 T.C. No. 11) the taxpayer offered the IRS a "bonded promissory note" in payment of her liabilities. Along with the note, the taxpayer sent processing instructions to the IRS on how the note was to be posted as payment of the taxpayer's liabilities. The note and processing instructions purported to place a legal duty on the IRS to apply up to $5 million toward the liabilities. The IRS ignored the note and processing instructions and did not on account thereof apply any amount in payment of petitioner's liabilities. The Court held the note was not payment of the taxpayer's liabilities and penalties and assessed a penalty of $15,000 under Sec. 6673 where a taxpayer has maintained a proceeding primarily for delay.
In In re: Carlos F. Escribano & Co. Inc. (U.S. Bankruptcy Court for the District of Puerto Rico) the Court held that a Federal tax lien that had been properly filed was superior the a bank's interest in the debtor's accounts receivable.
Tip of the Day
Stick with plain vanilla in pension plans . . . Pension plans, including IRAs, are not the place to put exotic investments. There are at least two good reasons for this. First, since you probably have no basis in the investments, losses can't be deducted on your tax return. Second, the IRS may challenge the investment and that could render the plan not qualified. Should that happen the consequences could be costly. It makes more sense to keep your pension plan investments on the safe side and take the risk in your personal accounts.
September 1, 2010
News
In Bonnie Lou MacGregor (T.C. Memo. 2010-187) the taxpayer was unable to prove any basis in a partnership interest. As a result, the Tax Court held the entire amount received was a capital gain. Another issue was the amount of gain or loss on the foreclosure Generally, the amount realized from a sale or other disposition of property includes the amount of liabilities from which the transferor is discharged as a result of the sale or disposition. The amount realized from the transfer of the property in consideration of the discharge or reduction of indebtedness depends on whether the liability is recourse or nonrecourse. If the liability is nonrecourse, the amount realized includes the full amount of the remaining debt, and the fair market value of the property is irrelevant. If the debt is recourse, the amount realized is the fair market value of the property. The Court noted the IRS assumed the liability to be nonrecourse and the full amount of the debt was the amount realized on the foreclosure sale.
Tip of the Day
Every shareholder must consent to S election . . . Most corporations elect S status on startup and usually there are only a few shareholders who have held stock from the inception of the corporation. But that's not always true and you could find the S election void if you don't follow the rules. Each shareholder who owns (or is deemed to own) stock at the time the election is made must consent. If the election is made during the corporation's tax year for which it first takes effect, any person who held stock at any time during the part of that year that occurs before the election, must consent even though the person may have sold or transferred his or her shares before the election is made. For example, Sue, Fred and Mike were shareholders in Madison Inc. (a calendar-year corporation) during January, 2011. In early February Mike sells his shares to Fred. In early March Sue and Fred decide to elect S status for 2011. Mike must sign the consent section of Form 2553 because he owned shares during the first month of the tax year. On the other hand, if a new shareholder buys stock in the corporation after the election is made, he or she is not required to consent.
August 31, 2010
News
A distribution from a qualified plan such as petitioner's pension plan is generally includable in income of the distributee in the year of distribution. If a participant or beneficiary of a qualified plan receives a loan from the plan, that amount is treated as a distribution in the year received, unless: (1) The loan is evidenced by a legally enforceable agreement; (2) the amount does not exceed a specified maximum amount; (3) the loan is to be repaid within 5 years, unless it is a home loan; and (4) except as provided in regulations, the loan has substantially level amortization over the term of the loan with payments not less frequently than quarterly. If a plan fails to satisfy these requirements, a deemed distribution will occur at the first time those requirements are not satisfied. If a loan initially satisfies all four requirements, but one or more installment payments is not made when due in accordance with the terms of the loan, the failure to make such payments violates the level amortization requirement. Therefore, a deemed distribution occurs at the time of the failure. In Kwame Owusu (T.C. Memo. 2010-186) the Court found that the taxpayer made some initial payments on a loan from his pension plan but then failed to make payments, despite the availability of a "cure period". The Court found the taxpayer had received a premature distribution from the plan, was taxable on the full amount of the distribution and subject to a 10-percent penalty tax.
The U.S. Court of Appeals for the Eight Circuit has upheld the Tax Court's decision in Russell (T.C. Memo. 2009-29) that debt owed to the shareholders of an S corporation contributed in a Section 351 transaction to another corporation resulted in deemed satisfaction of the debt and gain to the corporation since the shareholders' basis in the debt was less than the principal balance.
Tip of the Day
Lost bills? . . . Misplace that emergency room bill for treatment after an accident? The towing bill when you wrecked the car? Or did you just not get a bill from the provider? If you never got a bill, you may think you're off the hook. But that bill may be just late in coming. Or sent to the wrong address. If you were covered by insurance, there is almost sure to be a deadline for filing a claim. You may find yourself having to pay the expense out of your own pocket. Or, you may find years later that the provider is still looking for his money--plus interest. (Another reason to check your credit report regularly.)
August 30, 2010
News
The IRS has released a web page with frequently asked questions and answers related to the One-Time Relief Program for Small Tax-Exempt Organizations. You can find additional information at www.irs.gov/charities/article/0,,id=225954,00.html.
A question of independent contractor or employee may be going before the U.S. Supreme Court. A taxpayer is appealing the decision of the Eight Circuit in Ronald E. Byers. The question presented is does the Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992), rule of weighing common law factors to determine whether a worker is an independent contractor or an employee apply to worker classification determinations arising in federal income tax cases?
Tip of the Day
Banks encouraged to lend to small businesses . . . But that encouragement by the government isn't resulting in a lot of new loans. One reason is that many small businesses who can afford to borrow are reluctant to do so because of economic uncertainty. Others may have had their credit score lowered because they've drawn down too high a percentage of their credit line or have too much debt. Excessive debt hurts in two ways--it results in a bad debt/equity ratio and impacts a businesses cash flow, and that's what lenders look at in determining ability to service the debt. The decline in value of real estate, both personal and business, usually used as collateral is also putting pressure on potential borrowers. Even when interest rates are low, high debt can negatively impact your businesses ability to be flexible.
August 27, 2010
News
In Carolyn P. Britton et al. (U.S. Court of Appeals, 1st Circuit) (unpublished per curiam opinion) the Court of Appeals affirmed the Tax Court decision holding the check-the-box regulations were valid and that the taxpayer's single member LLC was liable for unpaid employment taxes.
In Steven A. Sears (U.S. Court of Appeals, 9th Circuit) (unpublished per curiam opinion) the Court reversed a District Court order quashing third-party IRS summonses to financial institutions. The summonses sought information identifying clients in a criminal investigation of the taxpayer. The District Court held that clients' names were irrelevant to the IRS's investigation and that disclosing them would be "tantamount" to revealing privileged communications. The Court of Appeals reversed and remanded. The Court found the District Court erred in concluding that clients' names were irrelevant to the IRS's investigation. In addition the Court reviewed de novo the applicability of the attorney-client privilege, noting "It is well-settled that there is no privilege between a bank and a depositor."
Tip of the Day
Have to prove you made the mailing deadline? . . . If you're mailing material through the U.S. Postal Service it's the postmark date that counts (not the date on a mailing meter). A similar rule applies if you're using a private delivery service. In a recent Tax Court case the Court noted that an electronically generated label is applied to the cover of all items delivered by FedEx, including those items that already have an airbill attached. The date on which an item is given to FedEx for delivery is marked on the label. There are two types of labels (which are distinguishable from each other). One type of label is generated and applied to an item by a FedEx employee. The other type of label is generated (using computer software and/or hardware provided by FedEx) and applied to an item by a customer. If an item has a label generated and applied by a FedEx employee, the date marked on that label is treated as the postmark date for purposes of Sec. 7502, regardless of whether the item also has a label generated and applied by the customer. The Court found the taxpayer filed it's Tax Court petition late. Similar rules may apply to regular business transactions. Check your lease, contract, etc. If it's that critical, don't wait until the last minute.
August 26, 2010
News
Managing an investment is not a trade or business. You may be able to deduct such expenses as an itemized deduction, but not as a business expense on Schedule C. In Estate of Roger E. Stangeland et al. (T.C. Memo. 2010-185) the taxpayer claimed Schedule C expenses for managing various business, arguing that the business was consulting and the activity was engaged in for income or profit because the consulting activity increased the profitability of the taxpayer's other businesses. Alternatively, the taxpayer argued that the activity was part of the taxpayer's other undertakings. The Court did not agree with the taxpayer, citing the Supreme Court in Whipple that "Devoting one's time and energies to the affairs of a corporation is not of itself, and without more, a trade or business of the person so engaged. Though such activities may produce income, profit or gain in the form of dividends or enhancement in the value of an investment, this return is distinctive to the process of investing and is generated by the successful operation of the corporation's business as distinguished from the trade or business of the taxpayer himself. When the only return is that of an investor, the taxpayer has not satisfied his burden of demonstrating that he is engaged in a trade or business since investing is not a trade or business and the return to the taxpayer, though substantially the product of his services, legally arises not from his own trade or business but from that of the corporation." The Court also looked at the factors in the regulations and those considered in the past by the court and found that the consulting activity could not be aggregated with the other businesses. The Court also disallowed losses related to the operation of two aircraft because the taxpayer did not materially participate in the business.
Good recordkeeping is critical. However, you may be able to convince the Tax Court to allow the deductions under the Cohan rule. In Myrtis Stewart (T.C. Memo. 2010-184) the IRS disallowed the taxpayer's deductions for expenses related to rental properties. The Court found the testimony of the taxpayer and her witness to be honest and credible and allowed a deduction for the expenses where the taxpayer's testimony provided sufficient basis for the Court to estimate the amounts of her expenditures. The Court, however, did not allow a bad debt deduction because she did not establish the debt became worthless during the year nor that she had a basis in the debt. Her testimony and records were ambiguous. The Court also disallowed a deduction for theft losses related to antiques, artwork, coins, etc. because she failed to establish the fair market value of the items immediately before the alleged theft.
Tip of the Day
Take losses as you get older . . . You may have bought Madison Inc. stock 20 years ago and paid $50,000 and it's now worth only $5,000. While selling now will force you to fully accept the loss, holding on won't make any sense from a tax standpoint. If you die holding that stock and pass it on to your heirs, their cost basis will be the value on the date of your death. If that's $5,000, no one will have gotten the benefit of the $45,000 loss. If you begin selling the stock before you die, you may be able to use it to offset capital gains or up to $3,000 annually can be used to offset ordinary income. If you have losses and gains, it will probably make sense to take both so that they offset each other. A side benefit is that you'll free up some cash.
August 25, 2010
News
Victims of severe storms and flooding beginning July 22 in parts of Illinois may qualify for tax relief from the IRS. The President has declared the following counties a federal disaster area: Carroll, Cook, DuPage, Jo Daviess, Ogle, Stephenson and Winnebago. Individuals who reside or have a business in these counties may qualify for tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after July 22 and on or before Sept. 20 have been postponed retroactively to Sept. 20. In addition, the IRS is waiving the failure-to-deposit penalties for employment and excise deposits due on or after July 22 and on or before Aug. 6, as long as the deposits were made by Aug. 6. For additional information go to www.irs.gov/newsroom/article/0,,id=226773,00.html.
THe IRS has issued final regulations (T.D. 9499) amending existing regulations under Section 6411 relating to the computation and allowance of the tentative carryback adjustment. These regulations adopt without change the rules of the temporary regulations, which clarify that, for purposes of allowing a tentative adjustment, the IRS may credit or reduce the tentative adjustment by both assessed and certain unassessed tax liabilities. These final regulations affect taxpayers that file an application for a tentative carryback allowance. The regulations are effective August 24, 2010 and apply to applications for tentative refunds filed after August 23, 2010.
Tip of the Day
Can you afford the rent? . . . Or the other fixed costs? Many small business owners don't go through the trouble of doing a detailed budget before jumping into a business, renting new space, etc. But computing your fixed costs is critical. Rent can account for a significant portion of your total operating expenses and you could be locked in for as long as five years. While budgeting for variable costs is very important, those costs are dependent on volume and can be cut if sales decline or don't reach anticipated levels. Depending upon your type of business, you may have other fixed costs (e.g. equipment leases, franchise fees, etc.) that can also represent a significant portion of your total expenses.
August 24, 2010
News
The IRS has updated its Questions and Answers related to Net Operating Loss (NOL) carrybacks under The Worker, Homeownership, and Business Assistance Act of 2009. For the latest Q&As go to www.irs.gov/newsroom/article/0,,id=217370,00.html.
If the IRS determines that a taxpayer has failed to pay all the federal income tax owed for one or more years, it may issue a notice of deficiency informing the taxpayer of the amount owed. Generally, a taxpayer is granted a 90-day hold on the collection of any tax deficiency, during which time an appeal may be taken by filing a petition in Tax Court. If, however, the IRS determines that collection of the deficiency amount is jeopardized or may become jeopardized by the standard delay, it may issue a jeopardy assessment. A taxpayer may challenge the reasonableness of a jeopardy assessment by seeking administrative review of the assessment within thirty (30) days of receiving written notice thereof. If the taxpayer is dissatisfied with the outcome of administrative review, the taxpayer may avail himself of expedited judicial review, which provides that the taxpayer may file suit in federal district court within 90 days of notification by the IRS of the outcome of administrative review. Under Section 7429, the district court may only consider two issues: (1) the reasonableness of the assessment under the circumstances and (2) the appropriateness of the amount assessed. The government bears the burden of proof with respect to the first issue, while the taxpayer bears the burden on the second issue. The district court may not decide the correctness of the underlying tax deficiency as determined by the IRS. In Marvel Thompson (U.S. District Court, W. Dist. Louisiana, Alexandria Div.) the Court noted that the case may only be prosecuted in the judicial district where the property is located at the time of levy. The Court held the case could only be prosecuted in the district where the taxpayer's arrest, seizure of funds and the IRS's jeopardy assessment occurred.
Tip of the Day
Payments for lost income . . . If your business receives payments for lost income (e.g., your store is damaged by a fire), any amount you receive is taxable as ordinary income. (Amounts you receive to replace property are payments for property and may be deferred if you replace the period within the applicable time period.) If you do business as a sole proprietorship, LLC, or partnership, the amounts you receive for lost income are subject to the self-employment tax. If you do receive compensation for a casualty loss, be sure to keep all the documentation.
August 23, 2010
News
Notice 2010-58 (IRB 2010-37) provides guidance in Q&A format under Sec. 13 of the Worker, Homeownership, and Business Assistance Act of 2009, which allows taxpayers to elect a 3, 4, or 5-year net operating loss (NOL) carryback instead of a normal 2-year carryback. The election applies to an applicable NOL, which is an NOL for a taxable year ending after December 31, 2007, and beginning before January 1, 2010. The notice answers frequently asked questions about election procedures, deadlines, and eligibility; the alternative tax net operating loss deduction; and the 50% limitation on an NOL carried back to the 5th preceding taxable year.
In Estate of Sarah M. Davenport (U.S. District Court, Eastern Dist. of Michigan, Southern Div.), the taxpayer sought a $262,932 refund of federal estate taxes assessed and collected by the IRS, following the death of the decedent. The government argued that the Court lacked jurisdiction over this case pursuant to Sec. 7422(a) because the estate failed to file with the IRS, prior to the commencement of this action, a "claim for refund." Alternatively, the government contended that the estate was precluded, under res judicata principles, from re-litigating issues related to its tax liability in light of the final judgment entered by the Tax Court. The Court sided with the IRS in finding the District Court lacked jurisdiction and that res judicata applied.
Tip of the Day
Track your stock basis . . . Sometimes finding the basis in stock you're selling is easy. Just go to the purchase ticket or statement. But things can get more complicated in some holdings--mergers, stock splits, reverse splits, shares spun off, etc. Stock splits and dividends can often be relatively straightforward, but other transactions can quickly become complex. While brokers will soon have to provide you with your basis, that won't be true for stock acquired years ago. You'll stand a better chance of getting it right if you keep all the paper work from your broker or other source. Computing basis may still not be easy, but it won't be as difficult as it would be without that documentation.
August 20, 2010
News
Consistent with an announcement made in April of this year, the IRS has issued proposed regulations to significantly increase the number of electronic transactions between taxpayers and the federal government. The proposed regulations (REG 153340-09) would eliminate the rules for making federal tax deposits by paper coupon because the paper coupon system will no longer be maintained by the Treasury Department after Dec. 31, 2010. The proposed regulations generally maintain existing rules for depositing federal taxes through the Electronic Federal Tax Payment System (EFTPS).
Normally, real property in an estate is valued at the fair market value at the date of death. But what if that real property is held in a C corporation and the property is virtually the corporation's only asset? That was the case in Estate of Marie J. Jensen et al. (T.C. Memo. 2010-182). The problem is, if the estate sells the real property, any gain will be taxed at the corporate level at 35% (we'll use that rate for simplicity). (And anyone buying the corporation will pay less because of this built-in long-term capital gains tax.) Thus, it's worth less than the full fair market value. For example, if Fred leaves Sue a property he bought for $100,000 that's worth $1,100,000 on his death. Sue's basis in the property is $1,100,000 and if she sells it the next day for that amount, she reports no gain or loss. On the other hand, if the property is in Fred's C corporation and he leaves Sue the stock, Sue will have to have the corporation sell the property to get the cash. The corporation will pay a tax of $350,000 on the sale of the property. The estate can adjust the value of the property down to reflect this built-in long-term capital gains tax. In this case the Court found the estate's experts more convincing than those of the IRS and accepted their approach and valuation.
The IRS announced (Rev. Rul. 2010-21; IRB 2010-39) that interest rates on under- and overpayments for the calendar quarter beginning October 1, 2010, will remain the same. The rates will be:
Tip of the Day
Capital gain tax planning . . . This year you might want to start extra early in your year-end tax planning. For 2010, the tax rate on long-term capital gains is 15% (0% for taxpayers in the 10 or 15% bracket). But, unless Congress acts, for taxable years beginning after December 31, 2010, the maximum rate of tax long-term capital gains for individuals will be 20 percent (10% for those in the 15% or 10% bracket). Property held more than 5 years would be taxed at no more than 18% (8% for those in the 15% or less bracket). The President has proposed making the current capital gain tax rates permanent, with a 20% rate applying only to individuals with AGI over $250,000 (married filing joint; $200,000 for unmarried taxpayers). The real risk here is that if Congress does nothing, the rate for most taxpayers will go from 15% to 20%. And, if Congress adopts the President's proposal, the rate will go up, but only for higher-income taxpayers. You may want to accelerate long-term capital gains into 2010. That's particularly true if you're selling real estate, a business, or a large block of stock. Also consider accelerating any installment sale. There are at least two cautions here. First, economic issues should take precedence over taxes. Second, there's a lot of interaction here. Recognizing a capital gain could increase your AGI enough for you to lose credits or deductions or to affect your alternative minimum tax situation. And, of course, we don't yet know what the rates will be in 2011. Talk to your tax and investment advisers and stay agile.
August 19, 2010
News
Victims of severe storms, flooding and tornadoes on June 1 in parts of Iowa may qualify for tax relief from the IRS. The President has declared the following counties a federal disaster area: Black Hawk, Cherokee, Clayton, Decatur, Delaware, Dubuque, Fayette, Franklin, Hamilton, Howard, Humboldt, Ida, Jackson, Jones, Kossuth, Lee, , Lucas, Lyon, Marion, O'Brien, Osceola, Ringgold, Sioux, Story, Taylor, Union, Warren, Webster and Wright. Individuals who reside or have a business in these counties may qualify for tax relief. The declaration permits the IRS to postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after June 1 and on or before Aug. 2 have been postponed retroactively to Aug. 2. In addition, the IRS is waiving 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. This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.
Before you go to court, make sure you're going to the right place. Once you've received statutory notice of deficiency, you have 90 days to petition the Tax Court. You no longer can dispute the underlying tax liability with the IRS. You can have a meeting with the IRS concerning the collection process. In Jose de Jesus Martinez et ux. (T.C. Memo. 2010-181) the Court held the taxpayers failed to petition the Tax Court and they were precluded from contesting the validity of the tax liability during their collection hearing and precluded from rasing the liability issue in the instant proceeding. The Court also noted that an offer-in-compromise based on doubt as to liability is likewise precluded if section 6330(c)(2)(B) applies.
Tip of the Day
Quick consumer recovery in doubt . . . Recent revenue reports by retailers have been mixed. Some have reported sales increases; others have been flat or down. A quick recovery in the housing market seems unlikely. There is some good news. First, results could be worse. Second, if you've been able to hold on this long and can survive a bit longer, you'll probably be facing less competition when things pick up. For now, the best advice is to stay as lean as possible, but watch the signs carefully. Be agile enough to take advantage of a pickup in the market.
August 18, 2010
News
Discharge of all debts in bankruptcy isn't automatic. In In Re: Bruce Bryen, (U.S. Bankruptcy Court, Eastern Dist. of Pennsylvania) the debtor earned between $80,000.00 and $200,000.00, maintained no personal bank accounts and enjoyed a relatively affluent lifestyle. He lived this life against the backdrop of a looming colossal tax obligation resulting from sham tax shelters that his accounting firm devised and promoted. The Court noted that for almost seven (7) years after his liability was determined, he neither earmarked nor paid anything toward his outstanding tax obligation. He then conveniently sought to discharge his liability in bankruptcy, virtually as soon as the opportunity presented itself. Although the IRS took no action for nearly five (5) years after the Tax Court issued the decision against the Debtor, once the IRS began the process of assessing the tax debt, two additional years passed during which he was fully aware of the magnitude of his liability; yet he made no effort to moderate his lifestyle, alter his system of managing his personal finances by "dealing in cash" or to pay anything the IRS. Had the Debtor apportioned some of his income for repayment during any period of time, his conduct might seem less manipulative and his intentions might appear more salutary, particularly given his professional and educational background. However, he did not. The Court found that, given all of the circumstances, it concluded that the IRS met its burden of establishing by a preponderance of the evidence that the Debtor willfully attempted to evade or defeat his tax liability. Therefore, the debt the Debtor owes for outstanding federal income taxes for the 1980 and 1982 through 1988 tax years is excepted from discharge pursuant to 11 U.S.C. Sec. 523(a)(1)(C).
Tip of the Day
Acquisition gone bad . . . We seem to recall that someone did a survey on how mergers and acquisitions fared and discovered a high percentage of them should never have been done. A classic was an acquisition at the height of the internet boom. Madison purchased Chatham (not the real names) for some $12 billion in stock. Madison sold Chatham some 5 years later for $95 million cash to Columbia. Columbia is now selling Chatham for $30 million.
August 17, 2010
News
The IRS has extended return-filing and payment deadlines for victims of severe storms, flooding and mudslides that began on July 17, in Pike County, Kentucky and resulting in the county being declared a federal disaster area. Taxpayers who qualify for assistance have until September 15, 2010, to file most tax returns, pay taxes, including estimated taxes, and perform other time-sensitive acts otherwise due on or after July 17, 2010, and on or before September 15, 2010. While this relief also applies to the filing of Form 5500, the postponement of the time to file and pay does not apply to information returns in the Form W-2, 1098, 1099 series, or to Forms 1042-S or 8027, or to employment or excise tax deposits. However, penalties for failure to timely file information returns can be waived, for reasonable cause, under existing procedures. In addition, the IRS will abate penalties for failure to make timely employment and excise tax deposits due on or after July 17, 2010, and on or before August 2, 2010, if the taxpayer made these deposits by August 2.
Tip of the Day
Anticipate cost overruns . . . Known a construction project that came in under budget? There probably was one, but we haven't heard of it. When did a contractor say "well Fred, the plumbing contractor lost a big job so he'll do yours for 25% less and cut the time in half"? If you have just enough funds available to do the job within the original budget, you're asking for trouble. There can be all sorts of reasons for overruns. Typical ones are bad cost estimates, unexpected problems, and change orders (including upgrades). The trick is to carefully track your budget and actual costs and get on top of any overruns before they get out of hand. Make sure the contractor knows you're watching him. Your contractor's a buddy? Not unusual. That makes the problem worse. It's tough being the heavy. Get your accountant, CFO, etc. to be the bad guy.
August 16, 2010
News
The IRS has issued final regulations (T.D. 9496) relating to information reporting requirements, information reporting penalties, and backup withholding requirements for payment card and third party network transactions. The final regulations implement section 6050W and related statutory changes enacted by the Housing Assistance Tax Act of 2008 that require payment settlement organizations to report payments in settlement of payment card and third party network transactions for each calendar year. The final regulations in this document will affect persons that make payment in settlement of payment card and third party network transactions and the payees of these transactions. The final regulations provide guidance to assist persons required to report payment card and third party network transactions and to the payees of those transactions.
The IRS has issued an update of Publication 1771, Charitable Contributions-Substantiation and Disclosure Requirements, which explains the federal tax law for organizations such as charities and churches that receive tax-deductible charitable contributions and for taxpayers who make contributions.
Tip of the Day
Understand your adversary's position . . . If you're negotiating the purchase or sale of a business, a major contract, hiring an employee, even the purchase of a home, you should understand your adversary's position. For example, why is he trying to sell his business? If he's trying to raise cash you might be able to negotiate a lower price. If you know he's desperate you might be able to offer a low ball number. On the other hand, if he's physically fit but just wants to retire, that approach won't work. He doesn't need to sell. Instead, offer to take care of the child he nurtured. You may be able to get the price lower, but only if you show him you'll treat the business the same as he did. The same is true for financing options. If he needs cash, an installment sale is unlikely to work. On the other hand, if he's got other interests that are profitable, an installment sale might ease his tax problems. Consult your attorney, accountant, and tax adviser to get their input.
August 13, 2010
News
The IRS has issued temporary (T.D. 9498) and proposed (REG-144762-09) regulations relating to the application of Section 108(i) to partnerships and S corporations and provides rules regarding the deferral of discharge of indebtedness income and original issue discount deductions by a partnership or an S corporation with respect to reacquisitions of applicable debt instruments after December 31, 2008, and before January 1, 2011. The regulations affect partnerships and S corporations with respect to reacquisitions of applicable debt instruments and their partners and shareholders.
The IRS has issued temporary (T.D. 9497) and proposed (REG-142800-09) regulations under Section 108(i). These regulations primarily affect C corporations regarding the acceleration of deferred discharge of indebtedness (COD) income (deferred COD income) and deferred original issue discount (OID) deductions (deferred OID deductions) under Section 108(i)(5)(D), and the calculation of earnings and profits as a result of an election under Section 108(i). In addition, these regulations provide rules applicable to all taxpayers regarding deferred OID deductions under Section 108(i) as a result of a reacquisition of an applicable debt instrument by an issuer or related party.
In Canal Corp. et al (135 T.C. No. 9) W, a wholly owned subsidiary of the taxpayer proposed to transfer its assets and most of its liabilities to a newly formed LLC in which W and GP, an unrelated corporation, would have ownership interests. The taxpayer hired an investment bank and an accounting firm, to advise it on structuring the transaction with GP. The taxpayer also asked the accounting firm to issue an opinion on the tax consequences of the transaction and conditioned the closing on receiving a "should" opinion from accountant's that the transaction qualified as tax free. The accounting firm issued an opinion that the transaction should not be treated as a taxable sale but rather as a tax free contribution of property to a partnership. W contributed approximately two-thirds of the LLC's total assets in 1999 in exchange for a 5-percent interest in the LLC and a special distribution of cash. W used a portion of the cash to make a loan to the taxpayer in return for a note from it. W's only assets after the transaction were its LLC interest, the note from the taxpayer and a corporate jet. The LLC obtained the funds for the cash distribution by receiving a bank loan. GP guaranteed the LLC's obligation to repay the loan. W agreed to indemnify GP if GP were called on to pay the principal of the bank loan pursuant to its guaranty. The LLC thereafter borrowed funds from a financial subsidiary of GP to retire the bank loan. GP entered into a separate transaction in 2001 that required it to divest its entire interest in the LLC for antitrust purposes. W subsequently sold its LLC interest to GP, and GP then sold the entire interest in the LLC to an unrelated party. The taxpayer reported gain from the sale on its consolidated Federal income tax return for 2001. The IRS determined that the taxpayer should have reported a gain when W contributed its assets to the LLC in 1999. The IRS also asserted a substantial understatement penalty under Sec. 6662(a) against the taxpayer in his amended answer. The Court held that the subsidiary's asset transfer to the LLC was a disguised sale under Sec. 707(a)(2)(B). The taxpayer must include gain from the sale on its consolidated Federal income tax return for 1999. The Court also held the taxpayer was liable for an accuracy-related penalty.
Tip of the Day
Buying a vacation home? . . . As with any major purchase you should look at your exit strategy at the time of purchase. Prices in many areas are now very attractive. But vacation homes (or any rural property) are often subject to generally lower demand. Moreover, demand in the near future may not be as robust as before the financial crisis. Vacation properties are far from essentials and could continue to be under pressure if consumers remain less confident. That doesn't mean you shouldn't buy. It just means you want to make sure the property you're purchasing is generally more attractive than other properties. For example, lake front properties will always be in demand and command a premium. That might not be true for a less mainstream property that has an unusual design, is "off the grid" or has some uncorrectable drawback. And keep in mind that unless the property has a major feature (e.g., lake front), it could be on the market for longer than one in a metropolitan area.
August 12, 2010
News
You don't need a formal agreement to be engaged in a partnership. In Randal W. Holdner et al. (T.C. Memo. 2010-175) the father and son had an oral agreement that the son would manage the day-today farming activity on the separately owned properties in exchange for a share of the profits from cattle sales. The father was primarily responsible for the farm's financial affairs including arranging cattle sales, making payments to suppliers, and obtaining financing to purchase new farm properties. The father also agreed, at least initially, to contribute money to the farm, though it is unclear how much money he actually contributed or whether he expected to be repaid. They father and son agreed the son would be entitled to one-half of the gross proceeds from cattle sales and have an equity interest in the farm. On an insurance policy they listed the business as a partnership. The son often worked 16-18 hour days; the father spent about 50% of his professional time devoted to the operation. In a few instances the taxpayers shared expenses in the same way they shared gains; i.e., 50-50. In most instances, however, the father allocated the expenses between himself and his son as he saw fit. The allocation of the expenses between the taxpayers did not bear any apparent relationship to their respective ownership interests in, or their respective levels of involvement with the farm. In fact, the allocation of expenses made by the father had no apparent rational basis and appeared completely arbitrary. The Tax Court examined the 8 factors enumerated in Luna:
[1] The agreement of the parties and their conduct in executing its terms; [2] the contributions, if any, which each party has made to the venture; [3] the parties' control over income and capital and the right of each to make withdrawals; [4] whether each party was a principal and coproprietor, sharing a mutual . . . obligation to share losses . . . ; [5] whether business was conducted in the joint names of the parties; [6] whether the parties filed Federal partnership returns or otherwise represented to respondent or to persons with whom they dealt that they were joint venturers; [7] whether separate books of account were maintained for the venture; and [8] whether the parties exercised mutual control over and assumed mutual responsibilities for the enterprise.
and found a partnership existed. The Court also found that the father and son were equal partners in the partnership and had to allocate both income and expenses equally.
ESOPs (Employee Stock Ownership Plans) can provide substantial benefits for small businesses, but they are qualified plans that must meet certain requirements. In Yarish Consulting Inc. (T.C. Memo. 2010-174) the taxpayer created an ESOP and was issued a favorable determination letter by the IRS that allowed the ESOP to be treated as an exempt trust under Sec. 501(a). The determination letter included a proviso that the plan's continued qualification would depend on the plan's effect in operation. The ESOP was later audited and found that rank and file employees of related entities received no benefit from the ESOP. The IRS determined that the ESOP was not qualified as a retirement plan under section 401(a) and issued the revocation letter to the ESOP retroactively revoking the determination letter. The taxpayer challenged the retroactive revocation of the ESOP's qualification arguing that the IRS could not retroactively revoke the determination letter because the ESOP had terminated and all its assets had been distributed when the IRS issued the revocation. The Court noted that a taxpayer may challenge a retroactive revocation of the ESOP's qualification if the IRS action was arbitrary or capricious. Taxpayers may request that the Commissioner limit a revoked ruling's retroactive effect by filing a technical advice request. Rev. Proc. 2008-4. Taxpayers must include a written statement that the claim is being made under Section 7805(b). The taxpayer failed to do so. The Court also noted the taxpayer's "scrivener's error" defense did not apply here. The Court allowed the retroactive revocation of the ESOP's qualification.
Tip of the Day
K-1 income reportable . . . If you're a shareholder in an S corporation or partner in a partnership (or LLC member) the income reported on the K-1 is taxable to you. You can't avoid the income just because you didn't receive any distributions or had no say in the business. Some taxpayers have claimed that they were in a dispute with the other shareholders or partners, but that isn't a valid excuse for not reporting the income. And, while it may be inequitable, you've got to report certain items (such as interest income) even though the business had an operating loss you can't claim because you didn't materially participate in the business. Make sure you do your homework before joining a partnership, LLC, or S corporation. You may find yourself liable for taxes on income you didn't receive and/or liable for filing returns in states the company did business.
August 11, 2010
News
In Estate of Margot Stewart et al. (U.S. Court of Appeals, 2nd Circuit) the Court of Appeals has vacated a Tax Court holding (T.C. Memo. 2006-225) that the decedent retained control over a portion of real property consisting of a residence and rental which she gave 49% of to her son. The Tax Court had found that the fair market value of the entire property was includable in her estate. The Appeals Court noted the decedent and her son shared the residential portion of the property at all applicable times. And while the decedent paid most of the expenses for the property, the decedent and the son rented another property whose income and expenses were not considered by the Tax Court. The Appeals Court sent the case back to the Tax Court so that it could make a factual determination necessary to determine the amount of the net income enjoyed by the decedent from the son's share. Dividends from a C corporation or distributions from an S corporation don't have to be in the form of cash and they don't have to be declared to be taxable. In R.V.J. Cezar Corp. et al. (T.C. Memo. 2010-173) the taxpayer, a construction company, built a house on company-owned land. The house and the land were subsequently transferred to the corporation's shareholders. The Court found that the distribution was a constructive dividend to the shareholders. Based on the earnings and profits of the corporation, part of the distribution was taxed as a dividend, part as a return of capital, and the remainder was taxed as a capital gain.
In Amy Ruth Jeffries (T.C. Memo. 2010-172) the taxpayer had filed for bankruptcy. While in bankruptcy she received a significant settlement from a discrimination case, the proceeds of which were taxable. The bankruptcy estate transferred substantial sums to the taxpayer, for no consideration. The Court noted that the bankruptcy estate's tax liability regarding the suit was a preexisting debt that was due and owing to the IRS at the close of the bankruptcy estate's tax year. The bankruptcy estate became insolvent as a result of the distribution to the taxpayer. The IRS sought to collect the tax liability from the taxpayer. The taxpayer argued that she did nothing wrong. However, the intent of the parties is not controlling. (A fraudulent conveyance may be set aside regardless of the motives of the parties.) The taxpayer argued that the IRS had not exhausted all efforts to collect the tax from the bankruptcy estate. However, state law (Ohio) does not require a creditor to prove that it exercised all reasonable efforts to collect the liability from the transferor before proceeding against the transferee. The Court held the distributions from the bankruptcy estate were fraudulent transfers and the taxpayer was liable for unpaid taxes.
Tip of the Day
Extra fees for shipping . . . Got a bad address for a customer? An incorrect address will cost you if you're shipping by FedEx or UPS ($11 a package for UPS Ground or FedEx). You can check addresses on line with both services. It doesn't take much to ruin your profit margin on a small order and it takes only a few seconds to check the address in their database.
August 10, 2010
News
In Dominick DeNaples et ux. et al. (T.C. Memo. 2010-171) the taxpayers' property was taken by eminent domain, and they reached a settlement on the amount of compensation, along with an amount designated as interest. The taxpayers received installment payments, along with interest accruing at the rate provided for in state law(installment payment interest). The taxpayers argued that the portion of the settlement interest in excess of the legally required interest is excludable from their gross income under Sec. 103, (relating to tax-exempt interest on municipal obligations). The taxpayers also argued that all of the installment payment interest is excludable under Sec. 103 because it was not required by law and was paid under the State's borrowing power. The Court noted that other courts have uniformly held the Section 103 exclusion inapplicable to interest paid in connection with condemnation proceedings. The Court held that no part of the settlement interest was excludable from the taxpayers' gross income under Sec. 103 and that the interest on installments was not excludable from the taxpayers' gross income under Sec. 103.
Who's responsible for an unpaid estate tax liability? In Carl M. Upchurch et al. (T.C. Memo. 2010-169), on audit the IRS disallowed a deduction for certain debts of the estate, holding that the debts claimed by family members were not an obligation of the estate but only a family disagreement. The IRS then sought to collect the additional tax. The IRS argued that two of the beneficiaries were liable as transferees (i) under equity principles long recognized in Illinois and (ii) at law under the Illinois Uniform Fraudulent Transfer Act (IUFTA). The Court looked to state law and held that they were liable as transferees under Illinois equity principles. The Court also considered the Failure to Pay Tax penalty assessed against the estate. The Court found it did not have jurisdiction because the IRS assessed the amount some 8 months after the notices of liability were issued. Thus, the penalty was not mentioned in either notice of liability. The Court also noted the record did not even establish directly the statutory authority for the penalty, other than to refer to it as the "Failure to Pay Tax" penalty in Form 4340, Certificate of Assessments, Payments, and Other Specified Matters.
Tip of the Day
Retaining employees saves money . . . There's no question it's cheaper and easier to retain a customer than to find a new one. The same is true of employees. There's a substantial cost associated with employees who quit or who you have to let go. Here's a short list of what the charges are:
Unfortunately, many of these costs won't show up as a line item on your income statement. What can you do? Calculate and track employee turnover. Is it better or worse than the industry average? If it's worse, take steps to find out the reasons and try to reduce the turnover. Find out why employees leave, and take steps to reduce it. Even if you're beating the industry, you should be able to analyze what you're doing and how you can improve.
August 9, 2010
News
On July 27, 2010, the President determined that certain areas in Iowa are eligible for assistance from the federal government under the Disaster Relief and Emergency Assistance Act as a result of severe storms and flooding beginning on May 12, 2010. Accordingly, taxpayers in the following counties who sustained losses attributable to the disaster may deduct the losses on their 2009 federal income tax returns: Des Moines and Lee.
On July 29, 2010, the president determined that certain areas in South Dakota are eligible for assistance from the government under the Act as a result of a severe storms, tornadoes and flooding beginning on June 16, 2010. Taxpayers in the following counties who sustained losses attributable to the disaster may deduct the losses on their 2009 returns: Dewey, Perkins and Ziebach, and the Cheyenne River Indian Reservation.
On July 29, 2010, the president determined that certain areas in Iowa are eligible for assistance from the government under the Act as a result of severe storms, flooding, and tornadoes beginning on June 1, 2010. Taxpayers in the following counties who sustained losses attributable to the disaster may deduct the losses on their 2009 returns: Adams, Appanoose, Audubon, Buena Vista, Butler, Cherokee, Clay, Davis, Decatur, Franklin, Howard, Humboldt, Iowa, Lee, Lyon, Madison, Marion, Mills, Monroe, Montgomery, O’Brien, Osceola, Palo Alto, Ringgold, Shelby, Union, Van Buren, Wapello, Warren, Wayne, Webster and Wright.
A July 23, 2010 notice in which certain areas in Kentucky were determined to be eligible for assistance under the Act has been amended. Taxpayers in Shelby County who sustained losses attributable to the disaster may deduct them on their 2009 returns.
The IRS has extended return-filing and payment deadlines for victims of Hurricane Alex that began on June 30, affecting the counties of Cameron, Hidalgo, Jim Hogg, Maverick, Starr, Val Verde, Webb and Zapata in Texas and resulting in these counties being declared a federal disaster area. Persons who qualify have until August 30, to file most tax returns, pay taxes, including estimated taxes, and perform other time-sensitive acts otherwise due on or after June 30, 2010, and on or before August 30, 2010. While this relief also applies to the filing of Form 5500, the postponement of the time to file and pay does not apply to information returns in the Form W-2, 1098 or 1099 series, to Forms 1042-S or 8027, or to employment or excise tax deposits. However, penalties for failure to timely file information returns can be waived, for reasonable cause, under existing procedures. In addition, the IRS will abate penalties for failure to make timely employment and excise tax deposits due on or after June 30, 2010, and on or before July 15, 2010, if the taxpayer made these deposits by July 15, 2010.
You may escape the 20%-accuracy-related penalty if you can show you relied on a professional in good faith. In Estate of Ralph Robinson (T.C. Memo. 2010-168) the son of the taxpayer had hired an enrolled agent to prepare his tax returns. A few years later the son also engaged the enrolled agent to do estate planning work for the decedent. On the taxpayer's death the son became the executor and relied on the enrolled agent to prepare the Form 706 Estate Tax Return. The IRS disallowed a large charitable contribution that was made on the advice of the agent. The Court found the executor reasonably relied on the expertise of the enrolled agent, not knowing the agent had been disbarred by the IRS. The Court found the estate not liable for the accuracy-related penalty.
Tip of the Day
High end tax cuts to expire? . . . It's pretty tough to predict what Congress will do, especially this year. But many signs point to higher taxes for upper-income taxpayers. Many economists and think tanks are suggesting it, clearly the deficit will become a problem in the not-too-distant future, etc. But the best reason to do it this year is that Congress doesn't have to do anything to make the higher rates become a reality. By doing nothing, they'll expire.
August 6, 2010
News
Classifying assets into the correct asset class (and thus, life) can make a big difference in your cash flow. Some assets clearly fall into one asset class. For example, assets used in the construction industry have a 5-year life under MACRS. But many assets don't fit into a class. If that's the case, they have a 7-year life. In PPL Corp. et al. (135 T.C. No. 8) the taxpayer was an electric utility. In addition to generating and distributing electricity, it provided light services (e.g., street lighting) for public and private entities. Street light assets include the light fixtures, hardware to mount the fixtures, various types of poles, and wires. The taxpayer and the IRS disputed the length in years of the recovery period that the taxpayer must use to calculate depreciation. The Court held the street lights were neither assets used in the distribution of electricity (where they would have a 20-year life) nor land improvements (a 15-year life). The Court held the street lights were property without a class life, and, thus 7-year property.
In limited situations, taxpayers filing joint Federal income tax returns may be relieved from joint and several liability pursuant to Section 6015. In Patricia Downs et al. (T.C. Memo. 2010-165) the taxpayer sought innocent spouse relief, but no return had been filed. The Court noted that a joint return must generally be filed for such relief. Where a taxpayer has consented to the filing of a joint return, that return may be considered joint even if only one taxpayer signed the return. Whether a husband and a wife intended to file a joint return is highly probative of whether the return qualifies as a joint return. The Court construed the testimony of both parties and the other evidence as affirming the taxpayer and her ex-spouse intended to file joint returns for the years at issue. The Court then examined the factors considered for relief and granted the taxpayer innocent spouse relief.
You may be able to quash an IRS summons if you have good reason. According to the Court, that wasn't the case in Charles Phillip Maxwell (U.S. District Court, Middle Dist. of Tennessee, Nashville Div.). The Court noted the taxpayer made a serious of frivolous arguments and that this was just one in a series of such filings. The Court both the prior warnings given the taxpayer and imposed a sanction of $1,500.
Tip of the Day
Plan ahead . . . Sounds like obvious advice? Then why are so many business owners and managers not doing it? Every day we see people sending documents or checks by overnight express when they knew about the deadline weeks earlier. Or ordering product at the last minute and paying an expedite fee or upcharge. Asking for a rush job is almost always more expensive, often by a significant factor. And even if there's no cost, you know your vendor isn't happy and may not respond as well in the future. The same is true for employees. Many will put in the extra time when there's a true emergency, but will soon tire of having to always put in overtime to extinguish fires. Not planning ahead can be costly.
August 5, 2010
News
The hobby loss rules can limit your deduction for losses from an activity if the IRS finds that you did not engage in the activity with an intent to make a profit. The regulations under Section 183 contain nine factors the courts can examine. In Linda K. Betts (T.C. Memo. 2010-164) the taxpayer listed her profession on her Schedule C (and later Schedule F) as horse training. The Court noted that the taxpayer maintained a separate checking account, used business cards, kept an Excel spreadsheet of her income and expenses, and kept a file for each horse. However, there was little evidence that the books and records were kept for the purpose of "cutting expenses, increasing profits, and evaluating the overall performance of the operation." When asked at trial, the taxpayer was unable to allocate profits and expenses to the sale of one horse because she "didn't break it out that horse used x amount of food and x amount of shavings and x amount of farrier." Without such knowledge, the taxpayer could not have known how profitable the entire operation was. The Court said there was no doubt she expected the horses to appreciate, but some of her expectations were unrealistic. And the Court was unconvinced by her argument that the real property should be included as part of her horse activity, particularly since she also used the real estate as her residence. The Court held the activity was not engaged in for profit and she was not entitled to deduct expenses in excess of her gross income from the activity.
The principal restriction imposed by the Consumer Credit Protection Act (CCPA) is that garnishment of an individual's disposable earnings is limited to twenty-five percent of the debtor's weekly earnings. The taxpayer argued that this restriction applies here to limit the garnishment of his half-pay inactive status benefits from his former employer. The IRS contended that 15 U.S.C. Sec. 1673(b)(1)(C)expressly removes the garnishment order obtained here from the protection of the CCPA altogether if the amount is for a debt due for any Federal tax. The question then becomes whether the restitution order on the taxpayer constitutes a debt due for any Federal tax. The Court agreed with the IRS that the unequivocal plain language of the law operates to eliminate the twenty-five percent garnishment limit in this case. (Clifford E. Clayton; U.S. Court of Appeals, 5th Circuit)
Tip of the Day
Economic outlook . . . In a word--uncertain. Some signs, such as industrial activity, point to recovery. Employment, consumer confidence and sales in many markets suggest continued uncertainty. Some economists are worried that the increase in manufacturing activity is just inventory rebuilding. As always, some segments of the economy are doing much better than others. Electronics and high tech are healthy; housing, appliances and furniture clearly aren't. Business owners can't hide in a closet, but you should be cautious in this environment. Conserving cash still makes sense.
August 4, 2010
News
The IRS has reissued interim guidance (SBSE-05-0710-036) dated August 4, 2009, with control number SB/SE-05-0809-019 titled, Interim Guidance for Offer in Compromise Mandatory Acceptance, on whether an offer in compromise (OIC) will be deemed an automatic acceptance under Sec. 7122(f). It also issues interim guidance on how to process OICs that are deemed accepted. Of note, the guidance states that an OIC will not be deemed to be accepted pursuant to section 7122(f), if within the 24 month period, the OIC is:
In H. Richard Shutts (T.C. Memo. 2010-160) on Mar. 22, 2005, the taxpayer and the IRS reached a basis of settlement in a deficiency case. Two days later, the taxpayer filed for bankruptcy. On Apr. 12, 2005, during the pendency of the bankruptcy action, the Tax Court entered decision pursuant to the parties' agreement. The IRS filed a motion for leave to file a motion to vacate and lodged a motion to vacate. The taxpayer objected to the granting of the motion. The Tax Court held that the Apr. 12, 2005 decision is void because it was entered in violation of the automatic stay of 11 U.S.C. sec. 362(a)(8) (2000). The IRS's motion for leave and its motion to vacate were both granted.
What's in a name? Plenty if the issue involves a tax lien. That was the case in Trane Co. v. CGI Mechanical Inc. et al. (U.S. District Court, Dist. of So. Carolina, Charleston Div.). Both Trane and the IRS held liens against CGI, but the IRS lien was filed under the company's former name, Clontz-Garrison Mechanical Contractors, Inc. If the Court found that the Notices of Federal Tax Lien (NFTL) are valid, the IRS is entitled to judgment in its favor because it filed notices before CGI confessed judgment in favor of Trane. The Court noted that Trane knew of the name change and continued to address correspondent to Clontz-Garrison after the name change. The Court found that under the circumstances, the NFTLs properly identified the taxpayer because a reasonable and diligent search by Trane would have disclosed the tax liens. The Court held the IRS's liens were entitled to priority.
Tip of the Day
Who's the owner? . . . It's not a trivial question. In fact it can be critical. For example, you purchase a truck for your business but instead of putting it in the name of Madison Inc. you title it in your own name. Madison may be the sole user of the truck, but it can't take depreciation since it doesn't own it. You can't depreciate it because you're not using it for business. Or the business owns the truck and you use it personally at least part of the time. You can't deduct the personal use. Sometimes the question is a little more esoteric. You operate as a corporation, but using your name, e.g., Fred Flood, MD, P.C. You want to sell the business. Who owns the goodwill associated with your name? Are you selling the goodwill personally, or is the corporation selling the goodwill? It can be important. If you intend to put an asset in a trust for estate purposes, you must actually change the title. There are pros and cons for owning an asset personally or through another entity. Talk to your attorney and tax advisor. Then make sure the ownership reflects what you intend. (Sole proprietorships don't have this problem. There is no difference between the owner and the business.)
August 3, 2010
News
In Dennis Klein (135 T.C. No. 7) the taxpayer filed a bankruptcy petition in December 2007 that the Bankruptcy Court dismissed in March 2009; he filed a second bankruptcy petition in October 2009, 7 months after the Bankruptcy Court had dismissed his first case. Two weeks later the IRS issued the taxpayer a notice of deficiency for 2006. In January 2010 (13 weeks after he filed his second bankruptcy petition and while the second bankruptcy case was still pending) he filed a petition in Tax Court for redetermination of the deficiency. After the Bankruptcy Court dismissed his second bankruptcy case, he filed a succession of four more bankruptcy petitions--three of which the Bankruptcy Court has dismissed; the latest case, his sixth, was still pending. The Tax Court held that pursuant to 11 U.S.C. sec. 362(c)(3) (2006), the automatic stay arising from the taxpayer's second bankruptcy petition terminated in November 2009--i.e., 30 days after he filed that bankruptcy petition. The stay therefore did not bar the commencement of the taxpayer's deficiency case under 11 U.S.C. sec. 362(a)(8), and the Tax Court has jurisdiction to consider his deficiency case. The Court further held that pursuant to 11 U.S.C. sec. 362(c)(4), no automatic stay arose following his third, fourth, fifth, and sixth bankruptcy petitions because he had two or more bankruptcy cases dismissed during the year before he filed each of those bankruptcy petitions. Therefore, 11 U.S.C. sec. 362(a)(8) did not stay the continuance of the current deficiency case.
You can't avoid the IRS (or another creditor) putting a lien on your property by transferring it to a related party for less than full consideration. Such a transfer is called a fraudulent conveyance. In Equity Investment Partners LP v. Karin Lenz et al. (U.S. District Court, Southern Dist. of Florida, Miami Div.) the taxpayer didn't transfer the property but encumbered it with a mortgage. The individual received much less than the amount of the mortgage in consideration, the mortgage occurred shortly before or after substantial debts were incurred, the individual did not have good title to the property when the mortgage was incurred, and the debtor retained possession of the property. The Court determined the mortgage and subsequent modification were fraudulent transfers under Florida law and the United States' tax lien took priority.
In Barry J. Jewell (U.S. Court of Appeals, 8th Circuit) the court found the District Court had not erred in an attorney's conviction for aiding and abetting tax evasion. The Court found attorney helped his clients underreport their income.
Tip of the Day
Read the fine print . . . Many bills (e.g., your monthly cell phone bill) specify that if you want to contest the bill, you might have only 30, 60, 90, etc. days to do so. Miss the deadline and you could be out of luck. Best advice? Review your bills as soon as possible after receiving them; certainly before paying them.
August 2, 2010
News
Notice 2010-55 provides guidance on filing Form 5500 and Schedule SB for single-employer defined benefit plans for plan sponsors who are considering use of the special funding rules under Sec. 430(c)(2)(D). New Sec. 430(c)(2)(D) permits a plan sponsor to reduce a plan’s minimum required contribution for certain years by electing to use an alternative shortfall amortization schedule. This notice also describes anticipated future guidance that will apply for sponsors of single-employer defined benefit pension plans with respect to an election to use these special funding rules. It will be published in IRB 2010-33.
Notice 2010-56 provides guidance on filing Form 5500 and Schedule MB for multiemployer defined benefit plans for plan sponsors who are considering use of the special funding rules under Sec. 431(b)(8), for a plan year for which the Form 5500 (and Schedule MB) is filed. This notice also describes anticipated future guidance that will apply for sponsors of multiemployer defined benefit pension plans with respect to the special funding rules under Sec. 431(b)(8). It will be published in IRB 2010-33.
T.D. 9495 removes the temporary regulations and provides final regulations that provide guidance to state and local governments that issue qualified zone academy bonds and to banks, insurance companies, and other taxpayers that hold those bonds on the program requirements for qualified zone academy bonds. The final regulations implement the amendments to Section 1397E and provide guidance on the maximum term, permissible use of proceeds, and remedial actions for qualified zone academy bonds.
Tip of the Day
Direct mail frequency . . . If your business relies heavily on direct mail, using catalogs, postcards, flyers, etc. frequency of mailing can be an important factor in your return on investment. The more frequent your mailings, the more sales you're likely to generate. But you can overdo it. In some cases mailing too often can generate customer fatigue. When that occurs sales per mailing may decline. You could even lose some customers. How often is too often will depend on a number of factors. Weekly mailings are not excessive for a grocery store. But that's probably too often for a tool, clothing, etc. catalog. Get advice from a professional and do some testing.
Copyright 2010 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536