Small Business Taxes & ManagementTM--Copyright 2018, A/N Group, Inc.
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June 21, 2018
NewsNotice 2018-48 lists the population census tracts the Secretary of the Treasury designates as qualified opportunity zones for purposes of Sections 1400Z-1 and 1400Z-2.
The IRS has announced the MeF maintenance build window is being extended on Sunday, June 24, 2018. Both ATS and Production systems will be unavailable from 12:00 a.m. until 1:00 p.m. Eastern. The build will deploy critical system updates.
Deductions for legal expenses are frequently an IRS audit trigger. These expenses may be nondeductible or may have to be capitalized. In Sky M. Lucas (T.C. Memo. 2018-80) the taxpayer claimed a deduction for legal expenses related to his divorce. The taxpayer argued the he was entitled to deductions to defend a claim for profits earned in his business. Using the "origin of the claim" test, the Court found the legal expenses were the result of defending his ownership interests in his business in a divorce action.
Tip of the DayDon't jump the gun . . . You just opened a new location for your service business about 50 miles away. Your current location has always done exceptionally well. Consider carefully when staffing and/or equiping the new location. You don't want to over hire only to lay off staff if the anticipated business doesn't materialize. But you don't want to be so short-staffed you'll have to disappoint potential customers. There are a lot of factors to consider. It helps if you can be flexible. For example, if the business doesn't depend on skilled workers, you may be able to easily increase staff if the demand is there. Most business owners tend to be optimists--that can be both a good thing and a bad. There's no rule of thumb here. However, you should be particularly careful when opening a second location. That may be the critical one to demonstrate whether your business can easily expand. And, as your business grows, you'll have more employees which allows for more flexibility in staffing.
June 20, 2018
NewsVictims of volcanic eruptions and earthquakes that occurred starting on May 3, 2018 in Hawaii may qualify for tax relief from the IRS. The President has declared that a major disaster exists in the State of Hawaii. Following the recent disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Hawaii will receive tax relief. Individuals who reside or have a business in Hawaii county 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 May 3, 2018, and ending Sept. 17, 2018, are granted additional time to file through Sept. 17, 2018. In addition, penalties on employment and excise tax deposits due on or after May 3, 2018, and ending May 18, 2018, will be abated as long as the deposits were made by May 18, 2018. For additional information go to Tax Relief for Victims of Volcanic Eruptions and Earthquakes in Hawaii.
Revenue Procedure 2018-35 (IRB 2018-27) provides a new automatic method change for certain taxpayers to change their method of accounting from applying Section 263A to citrus plant replanting costs to not applying Sec. 263A to those costs, pursuant to Section 263A(d)(2)(C). Section 263A(d)(2)(C) provides that Sec. 263A does not apply to certain costs that are paid or incurred by certain taxpayers for replanting citrus plants after the loss or damage of citrus plants. This revenue procedure modifies Rev. Proc. 2018-31 to provide procedures for obtaining automatic consent of the Commissioner.
Tip of the DayTrade war looming? . . . It's hard to say. In the U.S.-China as well as U.S.-Mexico-Canada dispute there are a lot of threats from both sides. Part of that is posturing, but the real danger is that no one will give ground and it becomes a reality. Who's going to be the winner? There's rarely a winner unless one side gives in, and if that happens the loser is likely to carry a grudge for some time. Because China is such a large trading partner and provides us with so many consumer items--from clothes to appliances--as well as raw materials and parts for our manufacturing lines, there are likely to be few industries that won't be impacted negatively. And there are ripple effects. When the price of oil rises you pay more for gas, which means you have less to spend so you dine out less. That effect is likely to happen with all items that get higher tariffs. Business owners should follow the news and approach projects cautiously until the dust settles.
June 19, 2018
NewsCongress is still planning on additional tax cuts in a "second phase" which would make the individual tax cuts that are not scheduled to expire in 10 years, permanent. Passage is likely to be more difficult than in the Tax Cuts and Jobs Act enacted in December.
The IRS has announced the applicable federal rates (AFRs) for July, 2018. In addition, the IRS announced the blended rate for 2018 is 2.03%.
When you (or your company) go to bankruptcy court, collection action on your debts are stayed. In William Charles Murphy, Plaintiff, Appellee (U.S. Court of Appeals, First Circuit) the Court held that an employee of the IRS willfully violated a discharge order when the employee knew of the discharge order and took an intentional action that violated the order. Under Sec. 7433(e), the IRS's good faith belief that it has a right to collect the purportedly discharged debts is not relevant to determining whether it “willfully violate[d]” the discharge order. Because the IRS's actions in this case meet this standard. The Court found the IRS liable for damages for a wrongful collection action.
Tip of the DayCharitable quid pro quo . . . By definition a charitable contribution is a gift where you receive nothing of value in return. But that's often not true for contributions made to many organizations. Make a $200 contribution to a public television station and get a DVD valued at $50. You can't deduct the full $200. There is a de minimus threshold. If, for that same contribution, all you receive in return is a program guide worth $5, you can deduct the full $200. You should get a letter from the charitable concerning the value of items received for the contribution.
June 18, 2018
NewsThe IRS is reporting that more than 2 million Individual Taxpayer Identification Numbers (ITINs) are set to expire at the end of 2018, and is urging affected taxpayers to submit their renewal applications soon to beat the rush and avoid refund delays next year. In the third year of the renewal program, the IRS has increased staffing to handle the anticipated influx of W-7 applications for renewal. This third wave of expiring ITINs is expected to affect as many as 2.7 million taxpayers. To help taxpayers, the renewal process for 2019 is beginning earlier than last year. Under the Protecting Americans from Tax Hikes (PATH) Act, ITINs that have not been used on a federal tax return at least once in the last three consecutive years will expire Dec. 31, 2018. In addition, ITINs with middle digits 73, 74, 75, 76, 77, 81 or 82 will also expire at the end of the year. These affected taxpayers who expect to file a tax return in 2019 must submit a renewal application as soon as possible. For more information, go to IR-2017-137.
The U.S. Department of the Treasury and the IRS have today the final round of Opportunity Zone designations for four additional states. In total, the program designated areas in all 50 states, the District of Columbia and five U.S. possessions. The Tax Cuts and Jobs Act created Opportunity Zones to spur investment in distressed communities throughout the country. New investments in Opportunity Zones can receive preferential tax treatment. Under the Tax Cuts and Jobs Act, States, D.C., and U.S. possessions nominate low-income communities to be designated as Qualified Opportunity Zones, which are eligible for the tax benefit. The final round of submissions were approved for: Florida; Nevada; Pennsylvania; and Utah. For more information, go to Treasury, IRS Announce Final Round of Opportunity Zone Designations.
Tip of the DayMove to another state? . . . Some taxpayers are considering a move to another state now that those high income and property taxes of states like New York, California, etc. are no longer deductble. You may want to move because of the high taxes, but think twice before pulling up stakes because of a lost tax deduction. If you're in the 37% bracket ($600,000 and over for married joint; $500,000 for single) a lost $30,000 tax deduction will cost you $11,100 in federal taxes. In the 32% bracket ($315,000 married joint; $157,500 single) $10,000 would cost you $3,200. Wanted to move to another state even before the new law? $11,000 in additional federal taxes may be the impetus you needed. There are plenty of other considerations such as schools, medical care, recreation, environment, friends and relatives, etc. Just changing your legal address to Florida where you have that vacation home? The high tax states are wise to that and you'll have to show a lot more than a Florida, North Carolina or Wyoming address on your tax return to show you're no longer a resident. Talk to your tax advisor before making a move.
June 15, 2018
NewsSection 6751(b)(1) requires personal, written supervisory approval of the initial determination “of [a penalty] assessment.” That section applies to all Title 26 penalties, except for penalties under Sections 6651, 6654, and 6655 and penalties that are automatically calculated through electronic means. In several recent cases the IRS was unable to show compliance with this section and a court did not allow the imposition of the penalty. Chief Counsel Notice CC-2018-006 advises Chief Counsel attorneys how to address compliance with Sec. 6751(b) when handling penalties in litigation.
What may seem obvious to you may not seem so to the IRS or a court. In Raghvendra Singh and Kiran Rawat (T.C. Memo. 2018-79) the Forms 1098 the taxpayers used to substantiate mortgage interest were rejected by the Tax Court because their home address was not shown on the forms, the record did not establish the property or properties to which the forms pertained, the record did not establish that the taxpayers owned the property or properties, and the record did not establish whether the property or properties constituted their primary residence, a vacation home, or investment property. The Court denied the taxpayers a deduction for the interest.
In James N. Gaunt and Lillian Gaunt (T.C. Memo. 2018-78) the taxpayers claimed a theft loss in their business. The Tax Court denied a deduction for the claimed loss for three reasons. First, the Court noted the taxpayers did not offer a "competent appraisal" of the stolen property and otherwise failed to establish its fair market value. Second, the taxpayers presented no evidence (such as receipts) demonstrating the missing items' costs or adjusted basis. In fact many of the items in question were expensed when bought so the taxpayer's basis in the items would have been zero. Finally, the Court was not convinced that the recovery the taxpayers sought from their insurance company was so unlikely that they could claim a deduction for 2010.
Tip of the DayRainy day fund for your home . . . Rent or own? To many people sounds like a no brainer. Owning is cheaper. That's true for most individuals and couples. But your expenses are not just the mortgage, taxes, and insurance. Start a rainy day fund right after you purchase. Depending on a number of factors, roofs may last only 20 years. That driveway may have to be sealcoated periodically. Some exteriors have to be painted periodically. Replacing a septic system can run from $10,000 to $20,000. Appliances don't last as long as they used to. You might even start a separate fund for discretionary items such as a new kitchen or redoing a bath. Can you finance these items through a big box home store or a contractor? Maybe, but it'll cost you more and limit your choices.
June 14, 2018
NewsYou've got to be careful if you're challenging IRS procedures. The Service is often right. And here, as in many cases you've got to show that the IRS abused its discretion. In Joseph C. Gallagher (T.C. Memo. 2018-77) the IRS issued notices of levy to collect trust fund recovery penalties (TFRP). The found it did not have jurisdiction over some quarters where the IRS had not issued collection notices for the periods. The taxpayer asserted an abuse of discretion by the settlement officer (SO) for declining the taxpayer's offer-in-compromise. He contended the SO overvalued one of his business assets, an LLC that held various rental properties. According to the taxpayer, the SO should have assigned zero asset value to this LLC because it was an asset “used for the production of income.” If an SO determines that an asset is necessary for the production of income, “it may be appropriate to adjust the income or expense calculation . . . to account for the loss of income stream if the asset were either liquidated or used as collateral to secure a loan.” But the Internal Revenue Manual (IRM) advises SOs to make no adjustment to income, and to include the asset equity in the taxpayer's reasonable collection potential, if the asset is not producing income. The Court found no abuse of discretion by the IRS.
Tip of the DayMultiple advisers . . . Even small businesses often have multiple advisers--an attorney, CPA, your banker, a personal financial advisor, an insurance agent, maybe more. Make sure that all concerned parties are on the same page. Most of the time, if there's any hint of tax or accounting concerns your lawyer will advise consulting your CPA--and vice versa. But others may not consider that. Setting up some insurance with your agent may require tax or regulatory filings, how the insurance is billed may affect the tax consequences. Your CPA is often one of the most knowledgeable about the broad implications of much of your business. And he'll defer to your attorney for legal implications. Talk to or email your CPA on a regular basis and keep him up to date on changes.
June 13, 2018
NewsIt appears that the IRS will issue guidance on the 20% passthrough deduction (Sec. 199A) within a month. The IRS Commissioner has also indicated that additional guidance will be needed and that may not be forthcoming until later this year. The word is the rules will not be simple and compliance could be challenging.
The IRS has issued proposed regulations (REG-106977-18) regarding the arbitrage investment restrictions under Section 148 applicable to tax-exempt bonds and other tax-advantaged bonds issued by State and local governments. The proposed regulations would clarify existing regulations regarding the definition of “investment-type property” covered by arbitrage restrictions by expressly providing an exception for investments in capital projects that are used in furtherance of the public purposes of the bonds.
In Maria G. Leslie (U.S. Court of Appeals, Ninth Circuit) the Court affirmed a Tax Court decision holding that amounts received in connection with as marital settlement agreement were alimony and taxable to the taxpayer. The separation agreement specified that the lump-sum payment was to be taxable to the taxpayer and deductible by her ex-spouse.
Tip of the DayHow much more interest on a higher rate or longer term loan? . . . The variation in rates among lenders on a car loan can be wider than you think, even if all the determining factors (e.g., credit score, new or use vehicle, etc.) are the same. The amount of interest you pay will also depend on term of the loan. A $20,000 car loan at 3% for 48 months will cost you $1,249. The total interest paid will increase to $1,562 for a 5-year loan, and to $2,199 for a 7-year loan. A 4-year loan at 6% will cost $2,546, about double the 3% rate. The same 6% loan will cost $4,542 if the term is 7 years instead of 4. Of course your monthly payment will be a lot less on the longer loan--about $292 per month (6%, 7 years) vs. $470 on 4-year loan at 6%. On a $20,000, 4-year loan each percentage point of interest will add about $400 to the total interest cost over the life of the loan. On a 7-year loan, each additional percentage point would cost about $700. Shopping for a lower rate (don't automatically accept what the dealer can get for you) will definitely be worth the effort. You should also go for the shortest loan you can afford.
June 12, 2018
NewsA contractor and attorney with a history of constructing and selling subsidized low-income housing formed an LLC that identified property owner and offered them discounted electricity in exchange for permission to install solar panels and related equipment on their property. The LLC remained the owner of the equipment and temporarily retained the benefits and burdens of ownership including tax credits and rebates. Then the LLC sells the solar equipment (and all rights and obligations therewith) to a buyer. One such buyer was the taxpayer, who purchased solar equipment on three host properties. Under the purchase agreement the taxpayer agreed to buy the solar equipment on host properties 1, 2, and 3, in addition to the rights and obligations under the corresponding PPAs. The purchase agreement specified that the “original use” of the solar equipment “shall commence on or after the Closing Date.” Instead of a fixed payment amount, the note representing part of the purchase price but required the taxpayer to pay towards the note all monthly revenue generated by the solar equipment. On their Schedule C the taxpayers reported no income, claimed various deductions including $255,000 of depreciation.
Tip of the DayEmployee fraud . . . While internet scams get the headlines, employee fraud is a major concern. Small businesses can be particularly vulnerable because they don't have the internal controls to make fraud more difficult. There are more than a few stories about how an employee in a small company managed to embezzle $200,000, $400,000 or more. And those are the ones where the perpretrator was caught. There are probably many times that number where the business just incurs losses, is sold, or goes bankrupt without ever discovering the theft. Some studies suggest a better than 25% chance a small business has been defrauded to a significant amount by an employee. Your CPA has ideas on ways to discourage fraud and ways to protect your business.
June 11, 2018
NewsThe IRS has announced the interest rate on underpayments and overpayments for the quarter beginning July 1, 2018. The rates are unchanged from the second quarter and will be 5 percent for overpayments (4 percent in the case of a corporation), 5 percent for underpayments, and 7 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 2.5 percent. See Rev. Rul. 2018-18. The IRS has published final regulations (T.D. 9833) that prevent a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner or certain related entities. This document also contains final regulations that allow consolidated group members that are partners in the same partnership to aggregate their bases in stock distributed by the partnership for the purpose of limiting the application of rules that might otherwise cause basis reduction or gain recognition. This document also contains final regulations that may also require certain corporations that engage in gain elimination transactions to reduce the basis of corporate assets or to recognize gain. These final regulations affect partnerships and their partners. Proposed Reg. Sec. 1.337(d)-3 and amendments to Reg. Secs. 1.732-1 and 1.732-2 have been adopted; Temp. Reg. Secs. 1.337(d)-3T and 1.732-1T have been deleted.
Tip of the DayPayroll tax deposit or estimated tax payment? . . . Individual estimated taxes are due June 15. You may also have a payroll tax deposit due. If cash is tight you might be tempted to not pay one or the other or both. Obviously, you should be paying both, but if you have to choose, make your payroll tax deposit. The penalty for not making your payroll deposit is a lot more than not paying estimated taxes. If you're in this predicament you've got to find out why. You should be budgeting to meet all your obligations. And even considering not making a required deposit should be great cause for concern. You may argue that a customer was late in paying, or a key employee was sick and you were late finishing a job, or . . . The truth is there should be enough slack in your budget to allow for a certain level of emergencies. If cash problems recur frequently you've got to discover why.
June 8, 2018
NewsIf you're an employee and incur business expenses that are not reimbursed, you could only deduct them on Schedule A as a miscellaneous itemized deduction. (Under the new tax law, such expenses are no longer deductible.) Independent contractors report income and deduct such expenses on Schedule C. In Slawomir J. Fiedziuszko and Alicia M. Fiedziuszko (T.C. Memo. 2018-75) the taxpayer claimed to be a statutory employee, that is, a worker who receives a W-2, but reports the income and his expenses on Schedule C. The definition of a statutory is fairly narrow, but includes agent-drivers or commission-drivers engaged in distributing meat, vegetable, and bakery products, a full-time life insurance salesman, and certain other workers. The taxpayer was a semi-retired engineer who worked from home and met the other requirements of a statutory employee. The Court noted that the box for such status was checked for 2010 and 2011, but not for 2012. The Court examined the facts and concluded that the lack of a check on a box on a W-2 was an error. The parties intended to form an independent consulting relationship and provided services under the same consulting contract with the company for 2011 and 2012 and there was no change in the relationship.
You can take a loss on tangible or intangible property that you abandon. But you've got to show you've actually abandoned the property. For example, you can't just put that old milling machine in the warehouse, you've actually got to scrap it and be able to prove it. How you do it depends on the equipment and the situation. Pictures, a receipt from a scrap dealer, even internal documents could help. Abandonment of ntangible assets such as goodwill can sometimes be even harder to document. In David B. Greenberg, et al. (T.C. Memo. 2018-74) the issue involved the abandonment of an intangible asset. The Court noted that a taxpayer was prove that it (1) owned the abandoned property; (2) intended to abandon the property; and (3) took affirmative action to abandon the property. (In addition to owning the property, you must also show your basis in the property.) The Court held that the taxpayers were not entitled to an abandonment loss on a partnership interest. The Court found the taxpayers failed to meet any of the three requirements and noted for a loss of the magnitude claimed one would expect to find a trail of documents, but there was none.
Tip of the DayHaven't filed your 2017 return . . . If you haven't filed, or requested an extension, and owe tax you can be subject to a penalty of 5 percent of any unpaid tax for each month or part of a month the return is late. If the return is filed more than 60 days after the April due date, or 60 days after the October date if you have an extension, the minimum penalty is the lesser of $210 or 100 percent of the unpaid tax. Thus, if you owe less than $210, the penalty is 100 percent of the tax due. If the tax due is more than $210, the penalty is at least $210. That's an expensive penalty if all you owe with the return is $300. Best advice? File and pay whatever you can. The same goes for state taxes. As usual, the rules vary widely, but many states have similar penalties. For more information on a the federal level, go to Missed the tax deadline and owe tax?
June 7, 2018
NewsThe IRS has announced that the MeF maintenance build window is being extended on Sunday, June 10, 2018. Both ATS and Production systems will be unavailable from 12:00 a.m. until 12:00 p.m. Eastern. The build will deploy critical system updates.
An owner, officer, or even an employee can be personally liable for failure to deposit employment taxes. In David J. Jarrett (T.C. Memo. 2018-73) the petitioner was a member of the board of directors of a tax-exempt organization. The position was uncompensated and volutary, but not honorary. The petitioner had control over a number of financial aspects of the organization. The IRS investigated and when it looked like the organization could not pay it decided to assess the trust fund recovery penalty against the petitioner personally. The IRS argued that despite the fact he was an unpaid volunteer, he was liable based on his control and that he signed checks for the organization. The petitioner conceded he was liable but argued he never received the Letter 1153 assessing the tax. The Court found the letter was mailed to his last known address and was, therefore, a valid notice. Such a notice is valid, even if never received. The Court also that the IRS did follow the requirements of Sec. 6751 with respect to supervisory approval when assessing the trust fund recovery penalty. The Court also held that the assessment period statute had not run.
Tip of the DayBuying a business? . . . There's a lot of activity in the marketplace. Many small businesses are changing hands because baby boomers are getting older and want to retire. If you're looking to buy, now might be a good time. An active market means you don't have to settle. Many buyers just look at the price and the sales or net income from the business. And, while important factors, chances are you're only paying a fraction of the selling price up front and paying the remainder over a number of years. And the money to make those payments will almost assuredly come from the business. That means the cash flow is the critical factor. Projecting cash flow is only slightly more difficult than projecting earnings. You can add back depreciation and amortization, but you've got to subtract any projected capital expenditures such as new equipment, major improvements or repairs, etc. since those don't reduce income for accounting proposes. And be sure to adjust earnings for your salary. It may have to be more than the former owner was getting, but it could be less. If you can't make the periodic payments to pay for the purchase, all the other metrics won't count.
June 6, 2018
NewsThe IRS has announced (IR-2018-131) that it will waive certain late-payment penalties relating to the Sec. 965 transition tax, and provided additional information for individuals subject to the Sec. 965 transition tax regarding the due date for relevant elections. The IRS explained the relief in three new FAQs, posted on the agency's tax reform page. These supplement 14 existing questions and answers that provide detailed guidance to taxpayers on reporting and paying the tax. Section 965, enacted in December 2017, imposes a transition tax on untaxed foreign earnings of foreign corporations owned by U.S. shareholders by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate. The transition tax generally may be paid in installments over an eight-year period when a taxpayer files a timely election under Section 965(h).
Distributions from pension plans or IRAs before age 59-1/2 are generally subject to a penalty (there are limited exceptions). In Yasmin Azam and Muhammad Ayub Azam (T.C. Memo. 2018-72) the taxpayer's qualified retirement plan was debited for $28. The Court found that the amount was a nontaxable administrative fee and not a taxable distribution and thus not a premature distribution subject to the penalty. On a second issue, the Court found the taxpayers had taxable income from a state income tax refund they did not report and where they could not show that they did not deduct the taxes on their prior tax return. On a third issue, the Court disallowed a $3,000 capital loss carryover where the taxpayers could not substantiate the loss carryover.
Tip of the DayRecession not far down the road? . . . More than a few economists are predicting a downturn in 2020. A smart businessman won't put money on either side of that bet. But it shouldn't be dismissed out of hand. The recovery is getting older and there are some indications a downturn is possible not far down the road. Before you start hoarding cash, keep in mind that the last recession was unusually deep. Most are far milder. And a myriad of factors can affect the economy--both good and bad. Best advice right now? Cautious optimism. Don't spend cash frivolously, but continue to invest in your business while watching for negative signs on the horizon.
June 5, 2018
NewsThe IRS Restructuring and Reform Act of 1998 included a goal for the IRS to have at least 80 percent of all tax returns filed electronically by Calendar Year 2007. In response to the continued decreases in paper-filed tax returns, IRS management announced plans in 2016 to further consolidate Tax Processing Centers from five to two by the end of Fiscal Year 2024. The IRS anticipates using the projected five-year cost savings of about $266 million to focus on taxpayer service, tax enforcement, and information technology. An audit by the Treasury Inspector General for Tax Administration (TIGTA) assessed the first phase of the IRS’s further consolidation of Processing Centers. The Cincinnati Tax Processing Center is the first site to ramp down its operations with a planned completion by the end of Fiscal Year 2019. In addition to establishing an oversight structure, the IRS took appropriate steps to prepare the affected Tax Processing Centers for the 2018 Filing Season. This included ensuring the completion of computer programming to enable the Kansas City and Ogden Tax Processing Centers to process both individual and business tax returns, ensuring that sufficient furniture and computer equipment were available and developing and providing training to employees. After consolidation the two remaining sites will have the capability to process both individual and business tax returns. IRS management also noted that this will provide a year-round processing environment at each location, which in turn should enhance recruitment and retention. For the complete report, go to www.treasury.gov/tigta/auditreports/2018reports/201840038fr.pdf.
In IRS Chief Counsel Advice (CCA 2018051409234706) the IRS acknowledged wide-spread confusion concerning the actions an employer must take by calendar year end and what actions are permitted after the calendar year end. The confusion is due in large part to the imprecise use of terms, including “claim” and “adjustment.” Of note, it is misleading to use the phrase “claim an adjustment” given that the claim process and the adjustment process are different. The X forms (e.g., Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund) are used by employers to make overpayment and underpayment adjustments to employment taxes or to claim refunds of overpaid employment taxes. An employer cannot file a “claim” for income taxes except for administrative errors - in which the amount reported on Form 941, line 3 (Federal income tax withheld from wages, tips, and other compensation), does not agree with the amount the employer withheld. See Sec. 31.6414-1. But, the employer can file an “adjusted return” if the error is discovered in the same calendar year employer paid the wages and if the employer also repaid or reimbursed the employees in the same year. See Secs. 31.6413(a)-2(c)(2)(i) and 31.6413(a)-1(b). See also Rev. Rul. 2009-39.
Tip of the DayMortgage just paid off? . . . Or refinancing? In either case you may no longer have your real estate taxes and homeowner's insurance included in your monthly payment and put in escrow. If so set up a date alarm in your phone, computer, tablet, etc. or use the old fashioned wall calendar to remind you of the payments. Check with your insurance company for options they provide. If you still have a mortgage and you let your homeowner's lapse, they may automatically sign you up for insurance and bill you. And the coverage they may provide could be far more expensive. If you have financial difficulty, talk to the lender as soon as possible. They will probably work with you and will definitely be happier than if they find out your taxes are in arrears or you haven't paid your insurance premiums. Got a rental property? Same advice applies, but in this case it's more likely they aren't collecting and paying the taxes and insurance premiums.
June 4, 2018
NewsIf you've filed your 2017 tax return but still not paid the balance due, you may receive IRS notice CP14 or CP501 in the near future. Fortunately, there are a number of options available for payment, including electronic funds transfer, credit card, check, money order or cash. Use the links below to get more information on the topics:
If you haven't paid you should also check out the other options available including an installment agreement, and offer in compromise, and asking the IRS to hold off on collection. In the meantime if you have funds available pay as much as you can. Paying any amount will reduce the monthly penalties. If you have a tax professional, ask him or her for advice. The worst thing to do is to ignore the notices or do nothing. You'll get more help if you take the initiative. Much the same is true for state income taxes. If you have to pay quarterly estimated taxes, you should keep current with that liability. If you qualify for an installment agreement or offer in compromise from the IRS, you're probably eligible for similar treatment from the state.
Tip of the DaySupervisory approval for penalties . . . Certain penalties imposed by the IRS require a supervisor's approval. Sec. 6751 states, in part, "No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination . . . " There have been a number of cases recently where this issue has come up. It appears that the IRS has either not been deligent about meeting this requirement or it doesn't have adequate documentation. In many cases the taxpayers have won and the penalties disallowed by the Tax Court. Since penalties can be a significant part of any assessment, get professional advice before automatically paying.
June 1, 2018
NewsThe IRS has issued proposed regulations (REG-102951-16) amending the rules (Reg. Secs. 301.6011-2 and 301.6721-1 for determining whether information returns must be filed using magnetic media (electronically). The proposed regulations would require that all information returns, regardless of type, be taken into account to determine whether a person meets the 250-return threshold and, therefore, must file the information returns electronically. The proposed regulations also would require any person required to file information returns electronically to file corrected information returns electronically, regardless of the number of corrected information returns being filed. The proposed regulations will affect persons required to file information returns.
Tip of the DayCP-2000 Notice . . . If you filed your return on time and information reported by a third party such as a bank, broker, employer, etc. on a Form 1099 or similar information return doesn't match what you reported on your return you'll receive an IRS Notice CP-2000. The notice provides detailed information about issues the IRS identified and provides steps taxpayers should take to resolve those issues. This isn't a formal audit notification but a letter to see if the taxpayer agrees or disagrees with the proposed tax changes. Taxpayers should respond to the CP2000 letter, usually within 30 days from the date printed on the letter. The IRS provides a phone number on each letter. IRS telephone assistors can explain the letter and what taxpayers need to do to resolve any discrepancies. If you don't respond or the information you provide is inadequate to resolve the issue, a Notice CP3219A, Statutory Notice of Deficiency is sent. Ignoring the CP-2000 notice isn't a good idea if there's a chance the mismatch can be resolved in your favor. You can find more information in Tax Return Reviews by Mail. You can also go to IRS.gov for Understanding Your CP2000 Notice.
May 31, 2018
NewsIn Joseph C. Becker and Mercy Grace Castro, et al. (T.C. Memo. 2018-69) the Tax Court found that the taxpayers' income records were inadequate and used the bank deposits method to reconstruct the income from the taxpayers' business. The Court rejected the taxpayers' claim that some of the deposits were nontaxable because he failed to provide any evidence to substantiate that argument. The Court also found the taxpayerts failed to report installment income from the sale of another business.
If you're claiming a bad debt deduction, you often have to prove two things--the fact that a bona fide debt exists and that it was worthless when the deduction was claimed. In Bradford J. Sarvak (T.C. Memo. 2018-68) the taxpayer, through his wholly owned S corporation, advanced amounts to a development company on numerous dates over a period of time. The taxpayer provided no documentation on the loan, other than the taxpayer's testimony there was no evidence the advances would carry an interest rate, there was no repayment of the amounts and there was no guarantee of repayment. The Court found the facts inconsistent with a bona fide loan. The Court also found the advances would not have been worthless in the year claimed. The Court noted that the taxpayer claimed the advances were uncollectible as of December 31, 2011, only 10 days after the last advance had been made and without making any efforts to collect the amounts allegedly owed. Moreover, despite the determination by the taxpayer the amounts were uncollectible, he continued to advance more funds. On a second issue, the Court found the taxpayer had capital gain income from the S corporation as a result of distributions from the corporation in excess of his basis in the corporation.
Tip of the DayNot every solution need be high tech . . . There's no question that computers have made most work easier. But there are times when a low tech solution is easier and faster. If you're doing some computations only once and they're not that complicated, grab the calculator and a pencil rather than opening a spreadsheet. You can use a computer to schedule multiple processes in a small job, but you can almost assuredly do it quicker with paper and pencil or a whiteboard. Whiteboards can be particularly useful. You can skip the projector if you're working with an audience. There are other examples. Got a dozen nails to drive? You could use a nail gun, but by the time you move the compressor and drag the hose the job would be long done if you used a hammer.
May 30, 2018
NewsRevenue Ruling 2018-17 (IRB 2018-25) clarifies that federal income tax withholding under Sec. 3405 and Form 1099-R reporting under Sec. 408 generally apply for the year a payment is made, as required by State law, from an individual retirement arrangement (IRA) to a State unclaimed property fund.
The Health Coverage Tax Credit (HCTC) is a refundable tax credit that covers 72.5 percent of the cost of qualified health insurance premiums for eligible individuals and qualified family members. Individuals can claim the HCTC in three ways: annually on their tax return, as advance monthly payments, or a combination of these two methods. The Treasury Inspector General for Tax Administration (TIGTA) performed an audit because it had previously found errors during the IRS’s 2016 Filing Season in processing tax returns that claimed the HCTC. In this review TIGTA identified that the IRS implemented processes and procedures in response to legislation retroactively extending the HCTC through Calendar Year 2019. This includes implementing processes to set eligibility indicators on individual’s tax accounts and establishing a systemic advance monthly payment process. However, programming and tax examiner errors continue to result in the erroneous processing of some HCTC claims. TIGTA's review identified that 3,839 (9.5 percent) of the 40,227 Tax Year 2016 tax returns with HCTC claims filed between January 21 and July 6, 2017, were erroneously processed. Because of these errors, taxpayers potentially did not receive HCTCs to which they were entitled or were erroneously allowed HCTCs to which they were not entitled. To see the full report, go to www.treasury.gov/tigta/auditreports/2018reports/201840035fr.pdf
If you have a net operating loss (NOL) for the year you can carry forward the loss to years with income. But you've got to be able to prove you had a loss. That means retaining documentation until three years after the loss for that year is utilized. In Cecile Barker (T.C. Memo. 2018-67) the Court found the taxpayer's documentation of the original losses inadequate. Bank records did not show the nature of the expense and canceled checks were missing for some of the years at issue. The Court found there was insufficient documentation to estimate the business' expenses. The Court disallowed the NOL deductions.
Tip of the DayDivide and conquer . . . Ever have one of those projects that's so large or overwhelming you simply avoid tackling it? One approach to dealing with the problem is breaking it down into smaller pieces that you can deal with and complete. The completion of part of the project can provide enough satisfaction and confidence to be an incentive to continue on. Breaking down the project may also allow you to get help where that wouldn't be possible otherwise. While this sounds obvious, many times it's not to the person facing the job.
May 29, 2018
NewsNotice 2018-42 modifies Notice 2018-03 with respect to the 2018 standard mileage rate for use in computing the deductible cost of operating an automobile. While the rates are unchanged in the new Notice (54.5 cents per mile for business; 18 cents for medical; 14 cents for charitable), Notice 2018-03 provided a maximum standard automobile cost of $27,300 for passenger automobiles and $31,000 for trucks and vans for purposes of computing the allowance under a fixed and variable rate (FAVR) plan for business usage. The new law, as indicated in Notice 2018-42, increases the depreciation limit for passenger autos placed in service after December 31, 2017. As a result, the maximum standard automobile cost may not exceed $50,000 for passenger autos (including vans and trucks) placed in sercice after December 31, 2017. The IRS also reminded taxpayers that under the new law moving expenses are no longer deductible (there's an exception for moves by military personnel) and unreimbursed business expenses are no longer deductible.
Since the enrollment renewal cycle has finished, the IRS Return Preparer Office (RPO) will send letters to Enrolled Agents (EAs) whose enrollment status is being terminated or inactivated because of failure to renew. Termination letters will go out in late May, while inactive letters will go out mid-June 2018. EAs with SSNs ending in 7, 8, or 9 (or those with no SSN) who have not renewed for the 2015 and 2018 cycles will have their enrollment placed in terminated status. Anyone in terminated status must re-take the Special Enrollment Exam to apply for re-enrollment. The same EAs who did not renew for the 2018 cycle will have their enrollment placed in inactive status. Anyone in inactive status can still submit a late renewal for approval with proof of CE. Additionally, RPO will be sending Letter 5781 to a random sample of EAs requesting verification of their continuing education credits for the past three years. If you have questions about your enrollment status, contact the Office of Enrollment at (855) 472-5540. For more information on both EA notifications and Letter 5781, see the Enrolled Agent News page on IRS.gov.
For small partnerships there are special audit procedures, one is that the partnership can't have a passthrough partner as a partner. In Mellow Partners, A Partnership (U.S. District Court, District of Columbia) the partnership was formed by two single-member LLCs. Generally, a single-member LLC is disregarded for tax purposes, but the Court found for the requirements of the small partnership audit procedures each single-member LLC was treated as a passthrough partner.
Tip of the DayResident for state tax purposes? . . . A resident of a state is taxed on all their income; a nonresident who works in the state or who has business or rental income from sources within the state is taxed only on the income earned in the state. Some states are more aggressive than others in claiming a taxpayer is a resident. The rules generally have been a "facts and circumstances" test. The state and courts would look at a number of factors such as where your family lives, where your driver's license is from, where you vote, how many days a year you're in the state (for any purpose), and other ties such as club affiliations, doctors, etc. Thus, you could be working in the state for 9 months and still be a nonresident for tax purposes. At least one state is now going to a 183 day rule. In the state 183 days or more during the year and you're a resident. The other factors aren't considered. Keep up to date on the rules in the states you work and do business in. There may be steps you can take to avoid a trap or lessen the burden.
May 25, 2018
NewsThe IRS and its state and industry Security Summit partners are warning (IR-2018-125) tax practitioners to beware of phishing emails posing as state accounting and professional associations. The IRS has received reports from tax professionals who received fake emails that were trying to trick them into disclosing their email usernames and passwords. Cybercriminals specifically targeted tax professionals in Iowa, Illinois, New Jersey and North Carolina. The IRS also received reports about a Canadian accounting association. The awkwardly worded phishing email states: “We kindly request that you follow this link HERE and sign in with your email to view this information from (name of accounting association) to all active members. This announcement has been updated for your kind information through our secure information sharing portal which is linked to your email server.” Tax practitioners nationwide should be on guard because cybercriminals can easily change their tactics, using other association names or making other adjustments in their scam attempts. Tax practitioners who are members of professional associations should go directly to those associations’ websites rather than open any links or attachments. Tax practitioners who receive suspicious emails related to taxes or the IRS, or phishing attempts to gain access to practitioner databases, should forward those emails to email@example.com.
You can only take a charitable contribution deduction for the full amount of cash or property donated if you don't receive something in return. If you receive something you must reduce the contribution by the fair market value of the amount received. (There's an exception for certain small items.) In Triumph Mixed Use Investments III, LLC, Fox Ridge Investments, LLC, Tax Matters Partner (T.C. Memo. 2018-65) the taxpayer, a real estate developer, took a deduction for real property and development credits to a city and received an approval for the taxpayer's development plan in exchange. The Court noted that if the donor receives something in return, the Court must value both the contribution and the amount received. The Court found that the taxpayer received a substantial benefit and failed to show the value of the consideration on the tax return. The Court held the taxpayer could not deduct the contribution.
Tip of the DayState employment tax credits . . . Employment tax credits for hiring individuals from targeted groups such as Supplemental Security Income recipients, veterans, etc. have been available on the federal level for a number of years. But many states provide credits for hiring based on similar criteria. While the rules are often similar to the federal ones, some individuals may be qualified for state but not federal purposes. There may be employment related credits in your state. And a credit is worth more than a deduction. It's a dollar-for-dollar reduction in taxes.
May 24, 2018
NewsThe IRS has issued Notice 2018-54 (IRB 2018-24) stating that proposed regulations will be issued addressing the deductibility of state and local tax payments for federal income tax purposes. The notice also informs taxpayers that federal law controls the characterization of the payments for federal income tax purposes regardless of the characterization of the payments under state law. The Tax Cuts and Jobs Act (TCJA) limited the amount of state and local taxes an individual can deduct in a calendar year to $10,000. In response to this new limitation, some state legislatures have adopted or are considering legislative proposals allowing taxpayers to make payments to specified entities in exchange for a tax credit against state and local taxes owed. The upcoming proposed regulations, to be issued in the near future, will help taxpayers understand the relationship between federal charitable contribution deductions and the new statutory limitation on the deduction of state and local taxes. Taxpayers should also be aware the U.S. Department of the Treasury and the Internal Revenue Service are continuing to monitor other legislative proposals being considered to ensure that federal law controls the characterization of deductions for federal income tax filings.
You may be able to avoid an understatement penalty if you can show you relied on professional tax advice. But, like most of tax law, you've got to read the fine print. In RB-1 Investment Partners, Eric Reinhart, Tax Matters Partner (T.C. Memo. 2018-64) the taxpayer claimed reliance on a law firm and the accounting firm that prepared the partnership return. The Court noted that reliance on the law firm was misplaced since it was also promoting the shelter. The taxpayer could not rely on the accounting firm because it claimed reliance on the law firm's expert opinion and did not separately issue an opinion. The Court found the taxpayer liable for the accuracy-related penalty.
Tip of the DayProperty transfers subject to sales tax . . . Most states that impose a sales tax have rules regarding the transfer of property outside of a purchase from a retailer. For example, you give your used truck to an old friend. The truck is valued at $4,000. In most states the transfer is subject to sales tax. On the other hand, many states have a exemption for the transfer to a relative. Had you given the truck to your daughter, tax may not have been due. Most states have an exemption for assets transferred to a corporation or partnership in exchange for an interest in the entity. You contribute a truck you own personally along with tools in exchange for all the stock of Madison Inc. Generally, that transaction is exempt from sales tax. Not infrequently, the exception is narrowly worded, so you've got to check the rules carefully. On the other hand, fewer states exempt a transaction going the other way, when the business transfers assets to the shareholders or partners. Again, check the rules. A mistake here could be costly.
May 23, 2018
NewsRev. Proc. 2018-34 (IRB 2018-23) provides indexing adjustments for certain provisions under Section 36B of the Code. In particular, it updates the Applicable Percentage Table in Sec. 36B(b)(3)(A)(i) to provide the Applicable Percentage Table for 2019. This table is used to calculate an individual's premium tax credit. This revenue procedure also updates the required contribution percentage in Sec. 36B(c)(2)(C)(i)(II) for plan years beginning after calendar year 2018. The percentage is used to determine whether an individual is eligible for affordable employer-sponsored minimum essential coverage under Sec. 36B.
Notice 2018-44 (IRB 2018-21) contains a correction to the foreign housing cost amount for 2018. Notice 2018-44 revokes Notice 2018-33 and provides the correct amount of the maximum housing expenses and the base housing amount for 2018 and also provides an updated table of adjusted limitations on housing expenses.
As a result of severe storms and flooding during the period beginning February 14 to March 4 in Indiana, taxpayers who sustained personal or business losses in the counties of Benton, Carroll, Clark, Crawford, Dearborn, Elkhart, Floyd, Fulton, Gibson, Harrison, Jasper, Jefferson, Lake, LaPorte, Marshall, Newton, Ohio, Perry, Porter, Spencer, St. Joseph, Starke, Switzerland, Vanderburgh, Vermillion, Wabash, Warren, Warrick and White may deduct them on their 2018 or 2017 returns. In addition, taxpayers in the counties of Carroll, Clark, Elkhart, Floyd, Harrison, Jefferson, Lake, Marshall, and St. Joseph counties may qualify for individual assistance and additional tax relief. For taxpayers in the latter group of counties, the IRS may postpone certain deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Feb. 14, 2018 and before June 29, 2018, are granted additional time to file through June 29, 2018. This includes the April 18 deadline for filing 2017 individual income tax returns and the April 18 and June 15 deadlines for making quarterly estimated tax payments. In addition, penalties on employment and excise tax deposits due on or after Feb. 14, 2018 and before March 1, 2018, will be abated as long as the deposits were made by March 1, 2018. For additional information, go to Tax relief for victims of severe storms and flooding in Indiana.
Tip of the DayGimmicks not the solution . . . Gimmicks such as a loyalty program or special deals will increase sales but they won't make up for a poorly run business. The first step is to have a competitive product or service. The second is to service the customer--on time delivery, refund or replacement of damaged product, etc. Whatever is appropriate for your business. The third is customer assistance. Respond to complaints and questions, make it easy to order, etc. If you've got that under control, you can work on the loyalty program, special sales, etc.
May 22, 2018
NewsThe IRS announced it will conduct the annual Memorial Day Systems Shutdown beginning Saturday, May 26, 2018 at 6:00 p.m. and ending on Tuesday, May 28, 2018 at 6:00 a.m. The Modernized e-File Systems (both Production and ATS) will not be available during this timeframe. Users should refrain from accessing the MeF Systems to transmit business/individual/state tax returns, retrieve acknowledgments or submit any other service requests.
You can only take losses sustained in an S corporation if you have sufficient basis. For loans to be included in your basis you have to have loaned the funds directly to the corporation or if you are the primary obligor on the loan. In Rupert E. Phillips, Sandra K. Phillips (U.S. Court of Appeals, Eleventh Circuit) the Court affirmed a Tax Court holding that the taxpayer-wife could not increase her basis in an S corporation despite the fact that she could be personally liable for judgments rendered against the corporation because the loans were in default. The taxpayer had not made any payments toward satisfying the judgments.
Tip of the DayFirst time home buyer? . . . Unless you've got some special knowledge and skills (e.g., you're a contractor) consider carefully before jumping into a home that needs more than paint and cutting back some overgrown foundation planting. Chances are you'll spend almost everything you had (maybe more than you had) on the purchase. You may be cash strapped for some time. Consider also you may be spending on items you hadn't expected to and that weren't caught in the engineer's report. Looking at the home knowing you'll have to redo the kitchen within a month? Get a good idea of the cost and add it mentally to the purchase to get an idea of the true cost. And then consider how you'll finance that.
May 21, 2018
NewsThe IRS has announced that guidance on the passthrough deduction enacted as part of the Tax Cuts and Jobs Act of 2017 (Sec. 199A) should be issued by the end of July. The guidance should be of assistance, but will not be in final form but in good shape and be open to taxpayer and practitioner suggestions.
If you've filed for bankruptcy, you're afforded protection from your creditors. They are no longer allowed to contact you to try an collect a debt. In In re: Lucy Thal, Debtor; In re: Robert Lee Slattery, Debtor (U.S. Bankruptcy Court, S.D. Florida) (two separate cases with the same result) the debtor filed a plan to pay a portion of the IRS priority claim. After the discharge from bankruptcy the IRS sent Notices of Intent to Seize for several tax years. In the first case the taxpayer filed a Motion for Contempt for Violation of the Discharge Injunction against the IRS arguing the the IRS violated the discharge injunction by attempting to collect the discharged debts. Because of the violation of the discharge injunction, the taxpayer asked the Court to hold the IRS in contempt and order the IRS to pay punitive damages as well as attorney fees and costs for the filing of the motion. The IRS responded that it stopped all action as soon as it was informed of the violation by the taxpayer. The IRS also argued that the taxpayer's request for attorney's fees and costs should be denied because the taxpayer, before filing the motion, failed to exhaust her administrative remedies as required. The Court held the taxpayers may claim damages, but not punitive damages against the IRS. It also held it could force the IRS to return any amounts seized, but, under Sec. 7430, it could not award damages without the taxpayer exhausting the administrative remedies available to the party within the IRS.
Tip of the DayGet detailed bills . . . If you're hiring a professional to do work for your business but the same professional provides services to individuals, get a detailed breakdown of the work performed. You don't want the IRS claiming that some or all of the work performed was personal in nature if it really was business related. That may be even more true now that most miscellaneous itemized deductions are no longer allowed.
May 18, 2018
NewsThe IRS is encouraging taxpayers who typically itemized their deductions on Schedule A of the Form 1040 to use the Withholding Calculator this year to perform a “paycheck checkup.” People who have itemized before may be affected by changes from the Tax Cuts and Jobs Act. Taxpayers who itemize should use the IRS Withholding Calculator to make sure their employers are withholding the appropriate amount of tax from their paychecks for their financial situation. Keep in mind that deductions for state and locals taxes and the deduction for mortgage interest will be limited in 2018. In addition, employee business expenses, investment management fees and other miscellaneous itemized amounts previously deductible will no longer be deductible. For additional information, go to IR-2018-120.
If your children do legitimate work for your business, you can deduct any reasonable salary paid them. But the work should be age appropriate and the younger the children, the more important accurate records become. In Harlan Wax et ux. (T.C. Memo. 2018-63) the parents claimed they employed their two children in their business and paid them by allowing them to use a business credit card for their personal expenses and then deducting the amount as salary. The Court noted that where a family relationship is involved, close scrutiny is applied to determine whether payments to or on behalf of a taxpayer's children are on account of an employment relationship or the family relationship and whether the amounts paid are reasonable for the work performed. The taxpayers did not keep track of the hours the children worked or the services they performed. The Court sided with the IRS in disallowing the amounts. The Court also disallowed other undocumented or unsubstantiated expenses. It further disallowed a deduction for the rental of an office in Florida where their children were going to school because the taxpayers could show no business purpose for the rental.
Cancellation of a debt you owe generally produces taxable income up to the amount canceled. There are a number of exceptions to the general rule, one of them is being insolvent at the time of the cancellation. In Vincent C. Hamilton et ux. (T.C. Memo. 2018-62) the husband, as a result of a chronic disability was no longer able to work and a significant student loan debt was forgiven. They claimed insolvency and did not report the forgiveness as income on their tax return. The taxpayers had, for nontax reasons, transferred a substantial cash balance to their son's bank account but continued to draw on the funds as necessary to pay their expenses. The IRS argued that the funds transferred to the son should be included in their assets. The Court agreed, finding the son to he holding the funds as a nominee, noting the taxpayers retained control of the funds and did not show they received anything in consideration for the transfer of the funds.
Tip of the DayMissed the 60-day IRA rollover deadline? . . . All may not be lost. You may be able to escape the penalty if you can an error by the financial institution (always get and keep any instructions) or illness, a casualty, etc. beyond your control. It's got to be a good reason. "It was allergy season" won't cut it. However, hospitalization, temporary disability and confined to your home, etc. may be enough. If you can perform your regular routine, go to work, etc. you problem won't avoid the penalty. Be prepared to document your situation. And talk to your tax adviser. There are no sure things here, but it's worth a try.
May 17, 2018
NewsRev. Proc. 2018-32 (IRB 2018-23) sets forth the extent to which grantors and contributors may rely on the listing of an organization in IRS databases of organizations eligible to receive tax-deductible contributions under Sec. 170, for purposes of determining whether the grants or contributions to such organizations may be deductible under Sec. 170, and for certain other purposes. This revenue procedure also provides safe harbors for determining that a grantor’s or contributor’s grant or contribution will not cause the grantor or contributor to be considered to be responsible for, or aware of, an act that results in an organization’s loss of public charity classification and for determining that a grant or contribution is considered an unusual grant.
Debt or equity? It makes a big difference to a business. Interest on debt is deductible; payments on equity aren't. And the characterization of an advance is important for a number of other purposes. In Dynamo Holdings Limited Partnership et al. (T.C. Memo. 2018-61) the IRS argued advances were equity; the taxpayer claimed they were debt. The loans were structured as demand notes with no maturity date. The Court noted that while the lack of a fixed maturity date to be "highly significant" in a debt vs. equity analysis, here there was a long standing practice of advancing and repaying loans. That would have made the lack of a maturity date lack of a concern but related-party demand note are generally afforded little weight. The Court also examined the other factors generally examined to determine if a bona fide creditor-debtor relationship existed and held that the loans were bona fide debt. On a second issue, whether the transfer of property between entities was done for less than fair market value, the taxpayers did not fare as well. The Court noted that transfers between family members or entities controlled by family members are subject to special scrutiny. The Court found that transfers were made at less than fair market value and were constructive distributions.
Tip of the DayExchange of life insurance contract . . . You may have purchased a life insurance policy years ago for a specific purpose such as paying estate taxes on your death and find that purpose no longer exists or that you could put the funds to better use. Simply cashing in a whole life policy can have tax consequences, some of them significant if held for some time. There are some options available. You can do a tax-free exchange of one life insurance policy for another, or exchange a life insurance policy for an endowment or annuity contract or for a qualified long-term care insurance contract. You can also exchange one annuity contract for another or for a qualified long-term care insurance contract. As always there are some fine points and selling, terminating or exchanging one of these contracts is a significant financial decision. Get good, independent, advice.
May 16, 2018
NewsIn these consolidated cases (Dynamo Holdings Limited Partnership et al., 150 T.C. No. 10) C, a corporation, and P, a partnership, share common ownership. During the years in issue C transferred property to P. The IRS argued that the transfers were gifts among the ultimate beneficial owners. The IRS argued in the alternative that the transfers were for less than fair market value and that the amounts of the discount are subject to withholding tax under Secs. 1442 and 1445(e)(3). The IRS determined that penalties under Sec. 6662(a) applied to the adjustments in the partnership proceeding and also determined additions to tax under Sec. 6651(a)(1) and penalties under Sec. 6656(a) against C. The Court noted that in an earlier case it held that in cases where the IRS bears the burden of production with respect to penalties under Sec. 7491(c), the burden of production includes evidence of written supervisory approval of penalties as required by Sec. 6751(b)(1). Under Sec. 7491(c), the IRS “shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.” The IRS filed a motion to reopen the record to supplement existing proof of supervisory approval. C and P moved for dismissal as to the penalties because the IRS did not meet the burden of production with respect to penalties under Sec. 7491(c). The Court held in a partnership-level proceeding the IRS does not bear the burden of production with respect to penalties under Sec. 7491(c). In addition, the Court held where the IRS does not bear the burden of production as to penalties, the lack of supervisory approval of penalties may be raised as a defense to those penalties. The Court also held C and P did not raise the lack of supervisory approval of penalties as a defense to penalties, and therefore the defense is waived. Finally, the Court held the motion to reopen the record was denied and the motion to dismiss as to penalties was denied.
Tip of the DayAnalyzing rental property purchase? . . . Some investors just look at the current income from the property; others are more interested in the residual value--that is what they can sell it for some years down the road. The proper approach is to look at the current income, the projected future income, and the residual value. Focusing on just the residual value is risky. The demographics could change, population decrease, the area change the type of residential or commercial use, traffic patterns change, etc. The longer the horizon, the riskier the valuation. Projected future income is riskier than current income simply because it is projected some years down the road. Tenants may not renew, rents could decline, etc. But just looking at current income can undervalue a potentially profitable property. There's software that can analyze different scenarios (e.g., different probabilities of tenant renewal, increases or decreases in rent, etc.). Do your homework before committing. Consider professional advice.
Copyright 2018 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