Posts Tagged ‘tax court’

Tax Roundup, 8/21/14: IRS says saving the company still “passive;” Tax Court says otherwise And: the $105.82 c-note!

Thursday, August 21st, 2014 by Joe Kristan

Programming note: No Tax Roundup will appear tomorrow, August 22.   I will be up in Ames helping teach the ISU Center for Agricultural Law and Taxation class “Affordable Care Act (ACA): What Practitioners Need to Know in the morning.  Webinar registration is closed, but you can still  attend as a walk-in.

 

S imageS imageS-SidewalkYou saved the company.  Big deal.  Apparently pulling the company you started from the brink of failure wasn’t enough to convince the IRS that a taxpayer “materially participated” and could deduct losses on his tax return.

Charles Wade was a founder of Thermoplastic Services, Inc. and Paragon Plastic Sheeting, both S corporations.  After his son Ashley took over daily management of the business, he still owned a significant stake in the company.  He never really retired, though.  From the Tax Court (my emphasis, footnotes omitted in all Tax Court quotes):

With Ashley there to handle day-to-day management, Mr. Wade became more focused on product and customer development. He did not have to live near business operations to perform these duties, so petitioners moved to Navarre, Florida. After the move he continued to make periodic visits to the facilities in Louisiana and regularly spoke on the phone with plant personnel.

In 2008 TSI and Paragon began struggling financially as prices for their products plummeted and revenues declined significantly. Mr. Wade’s involvement in the businesses became crucial during this crisis. To boost employee morale, he made three trips to the companies’ industrial facility in DeQuincy, Louisiana, during which he assured the employees that operations would continue. He also redoubled his research and development efforts to help TSI and Paragon recover from the financial downturn. During this time Mr. Wade invented a new technique for fireproofing polyethylene partitions, and he developed a method for treating plastics that would allow them to destroy common viruses and bacteria on contact. In addition to his research efforts, Mr. Wade ensured the companies’ financial viability by securing a new line of credit. Without Mr. Wade’s involvement in the companies, TSI and Paragon likely would not have survived.

Slacker.  At least according to the IRS, who said that this participation failed to rise to the level of “material participation” and disallowed over $3 million in pass-through losses on Mr. Wade’s return.

The Tax Court took a different view.  Judge Goeke explains :

A taxpayer materially participates in an activity for a given year if, “[b]ased on all of the facts and circumstances * * * the individual participates in the activity on a regular, continuous, and substantial basis during such year.” A taxpayer who participates in the activity for 100 hours or less during the year cannot satisfy this test, and more stringent requirements apply to those who participate in a management or investment capacity.  The record reflects that Mr. Wade spent over 100 hours participating in TSI and Paragon during 2008, and his participation consisted primarily of nonmanagement and noninvestment activities. Ashley managed the day-to-day operations of the companies; Mr. Wade focused more on product development and customer retention.

Although Mr. Wade took a step back when Ashley became involved in the companies’ management, he still played a major role in their 2008 activities. He researched and developed new technology that allowed TSI and Paragon to improve their products. He also secured financing for the companies that allowed them to continue operations, and he visited the industrial facilities throughout the year to meet with employees about their futures. These efforts were continuous,  regular, and substantial during 2008, and we accordingly hold that Mr. Wade materially participated in TSI and Paragon. 

20120801-2It’s notable that the judge did not require Mr. Wade to produce a daily log.  Apparently there was enough testimony and evidence to show that his participation crossed the 100 hour threshold.

The 100 hours might not have been considered enough under some circumstances.  Usually the IRS holds taxpayers to the default 500-hour test for material participation.  This case is unusual in its use of the fall-back 100-hour “facts and circumstances” test. It’s good to see the Tax Court use it, as the IRS seems to think this test never applies.

It’s also interesting that the efforts at “customer retention” were counted.  This could be useful in planning for the 3.8% Obamacare Net Investment Income Tax.  The NIIT taxes “passive” income, defined the same way as the passive loss rules.  A semi-retired S corporation owner who still calls on some of old accounts after turning daily operations over to successors might be able to avoid the NIIT under the logic of this case.  If so, though, it would be wise to keep a calendar to prove it.

Cite: Wade, T.C. Memo. 2014-169

Related:

Russ Fox, A Passive Activity Case Goes to the Taxpayers.  “Hopefully the IRS can get more of these cases right at audit and appeals–they’ll be dealing with many more of these over the coming years.”

Paul Neiffer, More than 100 but Less than 500.  “It is nice to see that a subjective test went in the taxpayer’s favor.”

Material participation basics.

 

How far does $100 go in your city?  Last week the Tax Foundation issued a map showing how far $100 goes in different states.  Now they have issued a new map in The Real Value of $100 in Metropolitan Areas (Tax Policy Bl0g).  It is wonderful — just scroll your cursor over your town.

In Des Moines, $100 is good for $105.82.  In New York, it gets you $81.83.

 

TaxGrrrl, Anna Nicole Smith’s Estate Loses Yet Another Run At The Marshall Fortune

Tony Nitti, Could The IRS Disallow Ice Bucket Challenge Charitable Contributions?  Go ahead, IRS, just try it.  You’re just too popular.

William McBride, Earnings Stripping, Competitiveness, and the Drive to Further Complicate the Corporate Tax (Tax Policy Blog)

Roberton Williams, One Downside Of Inversions: Higher Tax Bills For Stockholders (TaxVox)

Kay Bell, How does the U.S. corporate tax rate compare to other countries?  Poorly.

TaxProf, The IRS Scandal, Day 469

 

David Brunori, Using Local Cigarette Taxes for Schools Is Silly (Tax Analysts Blog).  Smoke ‘em if you got ‘em.  For the children!

Cara Griffith, Was Oregon’s Tax Incentive Deal With Intel Unnecessary? (Tax Analysts Blog).  No, it was absolutely necessary to enable the Governor of Oregon to issue this press release and YouTube announcement.  That’s the point, after all.

 

Quotable:

The United States gets little tax from Americans overseas today. Most of them live in high-tax countries and have no U.S. income tax in any event because of FTCs and the section 911 foreign earned income exclusion. But as we all know, Congress couldn’t care less about this subject, and this is all a non-starter. Better to place your money on a genetically modified flying pig.

Robert L. Williams in Tax Analysts ($link)

 

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Tax Roundup, 8/20/14: Keeping time reports isn’t just for CPAs anymore.

Wednesday, August 20th, 2014 by Joe Kristan

20120511-2Track your hours now, not when you get audited.  Doing time reports is no fun.  If I had a nickel for every CPA who left public accounting and told me how fun it is to not do time reports, I’d have multiple nickels.

Unfortunately, the tax law might make time sheets necessary for people who don’t charge by the hour.  The passive loss rules disallow losses if you don’t spend enough time on a loss activity to “materially participate.”  Obamacare uses the same rules to impose a 3.8% “Net Investment Income Tax” on “passive” income.

It’s up to the taxpayer to prove they spent enough time to “materially participate,” as a Mr. Graham from Arkansas learned yesterday in Tax Court.

The taxpayer wanted to convince Judge Nega that he met the tax law’s stiff tests to be a “real estate professional,” enabling him to deduct real estate rental losses.  If you are not a “professional,” these losses are automatically passive, and therefore deferred until there is passive income.  To be a real estate professional, the taxpayer has to both:

- Work at least 750 hours in real estate trades or businesses, and

- performs more than one-half of all personal services during the year in real property trades or businesses in which the taxpayer materially participates.

That’s a high bar to clear for a taxpayer with a day job.  Mr. Graham gave it a good try, providing a judge with spreadsheets to show that he did that work.  The judge remained unconvinced:

Mr. Graham did not keep a contemporaneous log or appointment calendar tracking his real estate services. His spreadsheets were created later, apparently in connection with the IRS audit. 

There were other problems:

Furthermore, the entries on the spreadsheets were improbable in that they were excessive, unusually duplicative, and counterfactual in some instances. As all petitioners’ rental properties were single-family homes, reporting 7 hours to install locks or 30 hours to place mulch on a single property (amongst other suspect entries) are overstatements at best. Performing maintenance for a tenant that did not pay rent for an entire year with no record of “past due rent” or any attempt to collect rent (as Mr. Graham would note on entries for other rental properties) seems dubious.

The judge ruled that the taxpayer failed to meet the tests.  Worse, the court upheld a 20% penalty: “We conclude that the exaggerated entries in petitioners’ spreadsheets negate their good faith in claiming deductions for rental real estate losses against their earned income.”

The Moral?  Maintain your time records now.  When the IRS comes calling, it’s too late.  And play it straight; the Tax Court didn’t just fall off the turnip truck.

Cite: Graham, T.C. Summ. Op. 2014-79. 

 

20130426-1Russ Fox, FBAR Filing Follies:

Joe Kristan reported last week that you cannot use Adobe Acrobat to file the FBAR; you must use Adobe Reader. In fact, if you have Adobe Acrobat installed on your computer and use Adobe Reader it won’t work either. Well, I have some mild good news about this.

Mild is right.

 

Peter Reilly, Robert Redford’s New York Tax Trouble Provides Lessons For Planners.  “You dodge non-resident state taxes, either on purpose or by accident, at the peril of missing out on a credit against the tax of your home state.”

Jason Dinesen, S-Corporation Compensation Revisited.  “But what should the salary be? And what if the year has ended and the W-2 deadlines have passed, but the corporate tax return still needs filed?”

Keith Fogg, Postponing Assessment and Collection of the IRC 6672 Liability (Procedurally Taxing).  Issues on the “trust fund” penalty imposed for not remitting withholding.

TaxGrrrl, Flipping Through History: Online Retailers Owe Popularity And Tax Treatment To Mail Order Catalogs:

Online shopping is again changing the way that we look at nexus but for now, more or less the same kinds of principles that ruled in the day of mail order catalogs are still good law. The law remains settled that in states that impose a sales tax, retailers that have established nexus must charge sales tax to customers in that state.

And just like in the old days, states want to extend their reach no matter how flimsy the nexus.

20140729-1Lyman Stone, New Upshot Tool Provides Historical Look at Migration (Tax Policy Blog):

Prominent changes in the data suggest that taxes may have a role in affecting migration, though certainly taxes are just one of many important variables, and probably not even the biggest factor. As always, talking about migration isn’t simple: migration data is challenging to measure and represent, and even more difficult to interpret.

I will be seeing Mr. Stone speak at the Iowa Association of Business and Industry Tax Committee this morning.  I’m geeking out already.

 

Jim Maule, “Give Us a Tax Break and We’ll Do Nice Things.” Not.  It seems the subsidized Yankees parking garages don’t stop with picking taxpayer pockets.

Kay Bell, Is it time for territorial taxation of businesses and individuals?  “Territorial taxation advocates hope that long local journey has at least now started.”

 

Howard Gleckman, Is Treasury About to Curb Tax Inversions on Its Own? (TaxVox).  If the law is whatever the current administration says it is, I look forward to the $20 million estate tax exclusion next time the GOP takes power.

Daniel Shaviro, The Obama Administration’s move towards greater unilateral executive action.  “And the conclusion might either be that one should tread a bit lightly after all, or that we are in big trouble whether one side unilaterally does so or not, given the accelerating breakdown of norms that, as Chait notes, are no less crucial than our express constitutional and legal structure to ‘secur[ing] our republic.’”

20130422-2The best and the brightest in action.  TIGTA: ObamaCare Medical Device Tax Is Raising 25% Less Revenue Than Expected, IRS Administration of Tax Is Rife With Errors (TaxProf)

 

TaxProf, The IRS Scandal, Day 468

 

News from the Profession.  AICPA Celebrates 400,000th Member Just Because (Caleb Newquist, Going Concern)

I can verify that a Kindle absorbs less coffee than paper.  Do readers absorb less from a Kindle than from paper? (Tyler Cowen)

 

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Tax Roundup, 8/13/14: Tax Fairies in the graveyard? And: another payroll service goes bad.

Wednesday, August 13th, 2014 by Joe Kristan

Funeral home signOf course cemetery lots are shooting up in value.  People are dying to get in!  Taxpayers seek the Tax Fairy in the strangest places.  The Tax Fairy is the mythical spirit who can make taxes go away magically, for a reasonable price to a tax wizard who claims to be able to summon her.  A Tax Court case yesterday found taxpayers looking for her in cemeteries (Emphasis mine; slightly edited for readability).

Judge Nega’s overview:

Heritage Memorial Park Associates 1995-2, Heritage Memorial Park Associates 1995-3 , and Heritage Memorial Park Associates 1995-4 (collectively, partnerships) are Maryland general partnerships. The partnerships were established to acquire cemetery sites, to hold the sites for over one year, and then to contribute the sites to qualified charitable organizations, with the aim to provide individuals who invested in the partnerships with charitable contribution deductions equal to the appraised values of the sites as of the times of the contributions. Glenn R. Johnston and his colleagues promoted the partnerships to wealthy individuals as a way for them to receive a return of tax benefits in the form of passthrough deductions or losses worth significantly more than the amounts invested. 

What sort of deductions?

…(petitioner) invested $37,500 in each partnership. He made these investments to increase the amounts of his charitable contributions for the subject years and, more particularly, to receive promoted tax benefits worth significantly more than his investments. He expected that his investments would return him tax benefits worth $50,000 for each subject year. 

HMPA 1995-2 claimed the $1,864,850 charitable contribution deduction on that return. Petitioner was allocated $135,127 of that deduction, and petitioners deducted the $135,127 on their 1996 individual return as a charitable contribution. HMPA 1995-2 reported on its 1996 Form 1065 that HMPA 1995-2 had no income or expenses for 1996 (but for the charitable contribution deduction).

So: invest $35,000, deduct $135,000, save (conservatively) 1/3 of $135,000, or $45,000.  What could go wrong?

On September 29, 2005, Mr. Johnston was indicted on (1) one count of conspiracy to defraud the United States by selling, claiming, and causing others to sell and claim millions of dollars in false and fraudulent tax deductions for charitable contributions and concealing from the IRS income from the sales of the fraudulent deductions and (2) multiple counts of aiding and assisting in the filing of false returns by investors in the partnerships so that the investors claimed charitable contribution deductions in amounts substantially greater than allowable. These charges involved the partnerships, among one or more other entities. Mr. Johnston pleaded guilty to the first count on April 12, 2007.

Sure, it’s a criminal enterprise, but the deductions are still good, right?  And didn’t the statute run?  Nope.  The court ruled that the IRS met the procedural requirements to keep the statute of limitations open by properly initiating partnership-level proceedings.  The court also ruled that the taxpayer couldn’t claim a business loss for the partnership investments:

tax fairyPetitioners argue secondarily that they may deduct a $37,500 loss for each year as to petitioner’s investments in the partnerships. To that end, petitioners assert, petitioner’s ownership interests in the partnerships were worthless as of the end of the corresponding years in which the partnerships operated, and he knew that the interests were worthless as of those times and abandoned his interests as of those times. Petitioners add that petitioner invested in the partnerships to make a profit and in furtherance of a legislative intent to encourage charitable contributions.

But the court ruled that seeking charitable deductions isn’t a “trade or business,” and that no business loss was available.  $35,000 spent to net a tax savings of nothing.

The Moral?  This thing should never have passed the “too good to be true” test.  The deductions depended on incredible post-contribution appreciation in graves.  Anybody thinking this sort of thing might actually work really needs to get out more.  And there is no tax fairy.

Cite: McElroy, T.C. Memo 2014-163.

Related:  Three Years is the Normal Statute of Limitations, But Not Always (Paul Neiffer).

 

EFTPSAnother payroll service makes off with employers’ payroll tax payments.  From emissourian.com:

 

A Washington man pleaded guilty this week to federal mail fraud and money laundering charges.

Bradley Ferguson, 48, owner of Paymaster Business Solutions in Fenton, is scheduled to be sentenced Nov. 6 in U.S. District Court. 

He pleaded guilty to one felony count of mail fraud and one felony count of money laundering before U.S. District Judge E. Richard Webber.

Ferguson is accused of withdrawing money from the bank accounts of business clients to pay federal, state and local taxes but did not make the payments, according to a federal grand jury indictment.

While it makes sense for many taxpayers to outsource payroll functions, the tax law still holds the employers responsible for getting withholdings to the IRS.  If you outsource your payroll taxes, you should use Electronic Federal Tax Payment System (EFTPS) online access to make sure your payroll tax remittances are actually hitting your account.  If you use a service that doesn’t allow you to do this — like many “professional employer organizations” who “co-employ” their clients’ workers — you need to make other arrangements, like bonding, to protect yourself.

 

Peter Reilly, Alimony Deduction Requires Good Substantiation.  “It turns out that taxpayers are routinely whipsawing the IRS.”

William Perez, How to Get a Federal Tax Credit for the Cost of Child Care.

Kay Bell, James-Love NBA combo is tax boon to two Cleveland towns.

TaxGrrrl, Think Before You Post: The Dangers Of Seeking Tax Advice On The Internet:

I was pretty shocked at how much information folks were willing to share on the internet about their tax evasion questions, strategies and justifications. Sometimes, these folks are regular forum posters who happily share their location and other identifying information while others clearly try to remain somewhat anonymous.

In case you were wondering, the IRS has internet access.

 

Jason Dinesen, Rare Home Office Deduction Win in Tax Court

Carl Smith, In Some Cases IRS Seeks to Conflict Out Lawyers Who Represented Taxpayers in CDP Hearings (Procedurally Taxing).  CDP stands for “collections due process.”  The IRS is bigger than you, peasant.

 

Tony Nitti, Final IRS Rules On Partnership Technical Terminations Will Surprise Some Tax Pros

 

20140813-1David Brunori: Congress Shouldn’t Make State Tax Systems Worse (Tax Analysts Blog)

As my colleague Maria Koklanaris reported, 29 Democratic members of Congress asked leaders of the California State Legislature to reauthorize and expand the state’s film tax credit. Led by Rep. Adam B. Schiff, D-Calif., the federal lawmakers asked California to extend a very bad tax policy, saying that if it doesn’t, film jobs will be lost forever to other states. 

Why film credits? Why not some other industry? Politicians are the worst at determining what’s best for the marketplace. Despite the studies funded by the Motion Picture Association of America that say otherwise, film tax credits don’t work. In virtually every state that has them, there’s no discernible economic effect — that is, the tax giveaway did not result in more economic activity than would have occurred without it.

Iowa has some lessons to teach here.

 

TaxProf, The IRS Scandal, Day 461

 

There’s only one left? Owner of the Pickle pleads guilty to federal tax fraud.

Because you invited clients?   PwC’s Bob Moritz on Why You Shouldn’t Miss Your Kid’s Birthday Party for Work (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 8/8/14: Get a Room Edition. And: Koskinen, cronyist.

Friday, August 8th, 2014 by Joe Kristan

Flickr image by Ellenm1 under Creative Commons licenseTax Court: Get a room!  If you spend a lot of time on the road, you may have wondered whether it might make sense to buy a Winnebago instead of hopping between motels.  The Tax Court yesterday weighed in on the side of motels.

A California insurance man with an RV found a market for his wares among his fellow tin-can nomads, as the Judge Wherry explains:

Starting in 2004, petitioners began attending RV rallies not just for pleasure but also for business purposes. At or around the same time, they purchased a 2004 Winnebago RV. We reject petitioners’ contentions that they attended RV rallies solely for business purposes from 2004 but instead find that they had mixed purposes. Petitioners would gather sales leads at every rally. To that end, petitioners had a banner that they attached to their RV advertising Dell Jackson Insurance. Petitioners would set up an information table outside of their RV or outside the clubhouse, if the site had one. If they set up a table by a clubhouse, petitioners moved the banner from the RV to the table. Otherwise, the sign remained on the RV from the time they arrived until the time they left. Petitioners would invite potential customers to come to their RV, and they would sit either outside or inside the RV and discuss the prospective client’s insurance needs. It would often take months, if not years, for a relationship with a potential customer, which could begin with a lead, to develop into an actual sale.

Naturally the salesman deducted expenses of his RV in preparing the Schedule C for his insurance business.  The IRS limited his deductions using Section 280A, which limits business deductions for personal residences.  The Court said that the RV was a house, as far as the tax law is concerned (citations and footnotes omitted, emphasis added):

Generally, “a taxpayer uses the dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of — (A) 14 days, or (B) 10 percent of the number of days during such year for which such unit is rented at a fair rental.” “Dwelling unit” is also a defined term and “includes a house, apartment, condominium, mobile home, boat, or similar property”. Sec. 280A(f)(1)(A). This Court has previously held that a motor home qualifies as a dwelling unit within the meaning of section 280A(f)(1)(A).  Although we use the more modern term throughout this opinion, an RV and a motor home are one and the same thing. Petitioners and counsel used the two terms interchangeably at trial. Accordingly, petitioners’ RV is a dwelling unit for purposes of section 280A. 

The Tax Court said that while the expenses were otherwise legitimate, the Section 280A disallowance of business expenses when a residence, or part of one, isn’t used “exclusively” for business overrides the deductions:

This result may seem harsh, but it is the operation of the statute, which reflects Congress’ desire to prevent taxpayers from deducting personal expenses as business expenses.

While the court admitted the result was harsh to begin with, that didn’t stop it from piling on, adding over $8,000 in “accuracy-related” penalties to the $42,000 in additional taxes assessed by the IRS — another example of the unfortunate tendency of the IRS — with the blessing of the Tax Court — to penalize everything, even when the taxpayer used an apparently reputable preparer.

The moral: RVs may be great for retirement travel, but they aren’t the best thing for business deductions.  If they had rented hotel rooms, the deductions apparently would have been just fine.

Cite: Jackson, T.C. Memo 2014-160

 

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

So the IRS Commissioner is just fine with cronyism in tax administration.  John Koskinen Indicates IRS Revolving Door Is A Feature Not A Bug (Peter Reilly).  It will be hard to unseat Doug Shulman as the Worst Commissioner Ever, but John Koskinen is giving it the old college try.

 

Jason Dinesen, From the Archives: Iowa Tuition and Textbook Credit and Back-to-School Shopping

Jack Townsend, It’s So Easy to Say No — The IRS Often Gets to No for Streamlined Transition Relief in OVDP. “The bottom-line is that the IRS is denying the nonwillful certification in far more cases than practitioners thought would be the case.  And, the process of denial is a bit of a black box.”

Leslie Book, Summary Opinions for 7/25/14 (Procedurally Taxing).  A roundup of recent tax procedure happenings.

 

tax fairyKay Bell, FTC sending $16 million to former American Tax Relief clients. Don’t fall for tax relief scams in the first place:

Federal prosecutors first filed charges against ATR in 2010. In August 2012, a federal court entered a partial summary judgment in favor of the FTC, finding that the defendants falsely claimed they already had significantly reduced the tax debts of thousands of people and falsely told individual consumers they qualified for tax relief programs that would significantly reduce their tax debts.

The court issued a $103.3 million judgment against the company.

Outfits like ATR, J.K. Harris, TaxMasters and Roni Deutsch pulled in lots of revenue from taxpayers desperate to believe in the Tax Fairy.  There is no tax fairy.

 

 

It’s Friday, the Iowa State Fair is underway, and Robert D. Flach is buzzing!  So it’s a good day three ways.

20140808-1

 

TaxGrrrl, normally the soul of restraint, lets loose on the inversion diversion in Obama Joins Blame Game As Companies Flee U.S. For Lower Tax Rates:

But to point fingers at lawyers and accountants as if they are holding all the cards is plain wrong. If we want to talk about responsibility, let’s talk about responsibility.

Let’s talk about a bloated Tax Code that just keeps getting bigger. Let’s talk about a global tax system that encourages companies (and people) to flee. Let’s talk about stalled tax reform efforts.

The tax code is the instruction manual for taxpayers, and their lawyers and accountants, for tax compliance.  And now the politicians don’t like what happens when we read and follow instructions.

 

20120702-2Andrew Lundeen, To Stop Inversions, Fix the Tax Code (Tax Policy Blog).  “But the lack of competitiveness created by the corporate tax isn’t the only issue: at its core, the corporate tax is inherently not neutral. It is highly distortive, opaque, and economically damaging tax.”

Christopher Bergin, Beware the Individual Income Tax Inversion (Tax Analysts Blog)  “The truth is that our tax system is in trouble – all of it: the corporate side, the administration side, and the individual side. And that means the country is in trouble.”

Kelly Davis, Tax Policy and the Race for the Governor’s Mansion: Illinois Edition (Tax Justice Bl0g).  Political wrangling in a doomed state.

TaxProf, The IRS Scandal, Day 456.  The scandal has been Voxplained. Keep calm, all is well.

 

Art appreciation tip: “Like the folks who believe that the limits on maritime jurisdiction, explained by a talking salamander, holds the key to beating a federal criminal charge, the full tapestry of wacko tax fraud theories is a lovely thing to behold….” (Matt Kaiser, Above The Law).  He covers a “sovereign citizen” from Omaha who learned that filing a phony $19 million lien on a judge is perhaps not the optimal way to handle a tax controversy.

Related: TaxProf, Nebraska ‘Sovereign Citizen’ Convicted of Filing False Liens Against Federal Officials and Federal Tax Crimes

 

Adrienne Gonzalez, California Might Ditch the Attest Requirement for CPA Licensure.  I’m sure I would have been a better person if I had to waste two years observing inventories and otherwise bothering real auditors.

 

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Tax Roundup, 8/5/14: Personal goodwill is the word. And: more inversion diversion!

Tuesday, August 5th, 2014 by Joe Kristan

20120511-2Word.  Tax Court reduces estate value of stock by executive’s “personal goodwill.”  The courts have recognized that the value of a business depend on the contacts and reputation of a key executive — “personal goodwill.”  That concept has enabled business owners to sell their goodwill separately from other business assets — handy in avoiding the double tax inherent in C corporations.

Yesterday the Tax Court applied “personal goodwill” in valuing stock in a decedent’s estate.  Franklin Z. Adell died in 2006 owning all of the stock of STN.Com, a satellite uplink company.  The company had one customer: The Word Network, a religious broadcaster set up as a non-profit and run by Mr. Adell’s son, Kevin.

The arrangement proved profitable to STN.Com, which generated nearly $16 million in revenues in 2006.  That enabled company executives to travel in style, according to the Tax Court (footnotes omitted):

In addition to rent and compensation, STN.Com made several miscellaneous payments that were primarily for the personal benefit of Mr. Adell and Kevin. STN.Com leased luxury cars, including Bentleys and Rolls-Royces, used for personal and work purposes by Mr. Adell, Kevin, and its other employees. STN.Com also helped Mr. Adell and Kevin purchase and maintain real estate. For example, STN.Com gave money to Mr. Adell and Kevin to purchase a condominium in Los Angeles, California, and guaranteed the mortgage. STN.Com purchased high-end furnishings for the condominium and for Mr. Adell’s home in Michigan and paid all expenses, including the mortgage, interest, and insurance, related to Kevin’s second home in Florida. In 2002 STN.Com paid $300,000 toward Kevin’s home in Florida. From July 2002 through June 2003 STN.Com paid between $300,000 and $400,000 of Kevin’s personal legal fees for litigation involving a dispute with a home contractor. In 2006 Mr. Adell paid a $6 million judgment entered against Kevin using funds from Mr. Adell’s salary at STN.Com.

The estate filed a tax return showing a date-of-death value of $9.3 million.  The IRS thought that number was slightly low, coming up with a value of $93.3 million.  By the time of the trial, the IRS number had come down to $26,341,030, and the estate was arguing for a $4.3 million value.  The trial came down to a duel of expert witness appraisers.

The main difference between the appraisals was the  treatment of “personal goodwill” by the estate’s expert, a Mr. Risius.  From the Tax Court decision:

Mr. Risius also adjusted STN.Com’s operating expenses to include an economic charge for Kevin’s personal goodwill. Mr. Risius explained that the adjustment was appropriate because the success of STN.Com depended heavily on Kevin’s personal relationships with the board of directors of The Word. Moreover, Kevin did not have a noncompete agreement with STN.Com, and as a result a potential buyer would acquire STN.Com only to the extent that the company retained Kevin. The economic charge for Kevin’s personal goodwill ranged from 37.2% to 43.4% of sales over the historical period and from 43.7% to 44.1% of sales over the projection period.

The IRS expert, Mr. Burns, admitted the importance of the son’s personal involvement, but took a different approach:

Instead of applying an economic charge for Kevin’s personal goodwill similar to the one found in Mr. Risius’ first valuation report, Mr. Burns concluded that a hypothetical investor would anticipate retaining Kevin as an officer of STN.Com and would need to compensate Kevin at an acceptable rate of 8.1% of sales. Mr. Burns noted that his assumed compensation level for Kevin of nearly $1.3 million in 2006 was significantly higher than Mr. Risius’ estimate of $528,000 in his first valuation report.

20140321-4Tax Court Judge Paris found the estate’s approach more persuasive:

Kevin’s goodwill was personally owned independent of STN.Com. STN.Com’s success was heavily dependent on The Word because of their symbiotic relationship. To launch The Word, it was Kevin who contacted religious leaders in the Detroit area and Rev. Jackson in Chicago. Along with his notable contacts and his father, he went to Los Angeles to meet with DirecTV representatives about broadcasting The Word. His meeting was successful and it eventually led to the national broadcasting of The Word on cable television. Kevin was the face of the operation because he was the individual soliciting content and pursuing broadcast opportunities.

Yes, that Rev. Jackson.

     Further, Kevin did not transfer his goodwill to STN.Com through a covenant not to compete or other agreement. Kevin was free to leave STN.Com and use his relationships to directly compete against his previous employer. If Kevin quit, STN.Com could not exclusively use the relationships that Kevin cultivated; thus, the value of those relationships should not be attributed to STN.Com.

Accordingly, Mr. Risius properly adjusted STN.Com’s operating expenses to include an economic charge of $8 million to $12 million for Kevin’s personal goodwill at an amount high enough to account for the significant value of Kevin’s relationships. Mr. Burns, on the other hand, not only failed to apply an economic charge for Kevin’s personal goodwill but also gave too low an estimate of acceptable compensation for Kevin, i.e., $1.3 million in 2006. This was especially so because Kevin had stepped into the position of Mr. Adell, who had previously made between over $2 million and $7 million of compensation in each of the five years before his death.

The court went with the $9.3 million value on the original tax return: “…the Court concludes that Mr. Risius’ first valuation report on the STN.Com stock included with the original estate tax return was the most creditable because it properly accounted for Kevin’s personal goodwill and appropriately used the discounted cashflow analysis of the income approach to value the STN.Com stock.”

The moral?  Appraisers working with closely-held businesses need to look closely at important customer and vendor relationships and determine whether they actually belong to the corporation, or if they instead belong separately to executives.  The case also is more support for taxpayers wanting to sell personal goodwill separately from corporate assets.

Cite: Estate of Franklin Z. Adell T.C. Memo 2014-155.

 

20140805-2Robert D. Flach offers fresh Tuesday Buzz! Robert has also started a new monthly newsletter, The Tax Professional.  “The purpose of THE TAX PROFESSIONAL is to discuss and debate issues of interest and importance to the profession of preparing income tax returns – such as certification and credentials, dealing with the IRS and state tax agencies, due diligence requirements, ethics and obligations, regulation, representation, tax law complexity, etc.”  While I often disagree with Robert, he’s a smart and entertaining guy, and both his blog and the newsletter are worth regular visits.

 

Kay Bell, August to-do list: Vacation, shopping, school and taxes

 

Peter Reilly, Homeowner Association IRS Ruling Highlights Schizophrenic Nature Of Associations.  “Unless they have vast reserves earning significant investment income, homeowners associations can avoid any significant tax liability by filing Form 1120H, which allows the organization to exclude assessments.  Despite that option, some homeowners associations go to the trouble of applying to be 501(c)(4) social welfare organizations.”

Annette Nellen, Marijuana businesses and ethical issues for tax practitioners.  Can you get in trouble for helping a pot store pay its taxes?

 

Frank Agostino, a veteran Tax Court litigator, guests posts in Procedurally Taxing with Procedural Challenges to Penalties: Section 6751(b)(1)’s Signed Supervisory Approval Requirement.  “In view of the fact that the IRS (and the Tax Court) have so strictly adhered to the Code’s substantiation requirements, one is hopeful that a similar strict compliance standard will be applied when interpreting a statutory provision clearly intended to protect taxpayer’s procedural due process rights.”

Jack Townsend, Williams Yet Again – Court Bows Deeply to Government Claims of Expansive Discretion for FBAR Willful Penalty 

 

 

nra-blue-eagleThe current diversionary panic about corporate inversions has reached its illogical conclusion, reports J.D. Tucille at Reason.com: With Loyalty Oath Demand, Crusade Against Corporate Inversion Gets Even Creepier.

Leave it to Jonathan Alter to jump the already laughably overblown “problem” of corporations seeking friendlier tax jurisdictions elsewhere right past parody. Forget any discussion of why businesses are relocating. At the Daily Beast, Alter wants potential “corporate deserters” to take…wait, I have to check this again…yep…loyalty oaths

The post quotes Mr. Alter’s argument:

For those companies less able to act as Americans or recognize their real interests, there are two ways to make this work. The president should issue an executive order that says any company that wants to keep its federal contracts must sign a new-fangled [non-desertion agreement]…

But other companies with few or no federal contracts might be tempted to desert anyway.

That’s where the rest of us come in. Under my scheme, companies that sign non-desertion agreements would embed a tiny American flag or some other Good Housekeeping-type seal in their corporate insignia for all to see, just as companies during the Great Depression that agreed to Franklin Roosevelt’s recovery plan hung an emblem of a blue eagle in their windows with the legend, “We Do Our Part.”

Mr. Tucille observes:

To make it clear where this all goes, the National Recovery Administration once boasted, “The Fascist Principles are very similar to those we have been evolving here in America.” Its head, Hugh Johnson, noted about the adoption or rejection of the blue eagle symbol and its code, “Those who are not with us are against us.”

There’s a good book about this sort of thing.

Corporations have entirely legitimate purposes other than funneling cash to the IRS.  They have to make payroll, supply desired and needed goods to customers, and provide a return to their owners.  They have no more obligation to pay un-owed taxes than you, me, or Mr. Alter.  Unless Mr. Alter declines to itemize and forgoes his personal exemption in the name of economic patriotism, no blue eagle for him either.

 

20140805-1Kyle Pomerleau, Everything You Need to Know About Corporate Inversions (Tax Policy Blog). “The most obvious benefit is that most countries do not have a worldwide corporate income tax system. The United States taxes income earned by U.S. corporations no matter where they earn that income, domestically or abroad.”

Martin Sullivan, Don’t Count on Tax Reform to Stop Inversions (Tax Analysts Blog)

Rebecca Wilkins, Wall Street a Major Player in Current Wave of Corporate Inversions (Tax Justice Blog).  Maybe because investors like companies that don’t incur unnecessary expenses.

 

Renu Zaretsky, Online Taxes: Searches, Storage, and Sales.  The daily TaxVox headline roundup covers, among other things, an insane attempt to tax websites that link to Spanish newspaper association stories.  “Note to Spanish tax authorities: buena suerte.”

 

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Tax Roundup, 7/11/14: Wilderness edition. And: the hazards of doing it yourself.

Friday, July 11th, 2014 by Joe Kristan
Photo courtesy Philmontscoutranch.org

Photo courtesy Philmontscoutranch.org

Programming note.  The Tax Update goes untended for the next two weeks, as I head to Philmont Scout Ranch with my younger son and others for a 10-day backpacking odyssey.  It’s my first visit to New Mexico and my first extended backpacking trip.  Horses, carabiners, and black powder rifles will be encountered.  Whatever remains of me will be back here July 28.  The lovely and talented folks in the blogroll to the right will keep the tax world under control in the meantime.

 

Accounting Today visitors: if you followed the newsletter link here, you probably are looking for this: July 5, 1944.

 

Does the tax law cause people to do work on rental properties that they really should hire out?   That’s one conclusion you could draw from a Tax Court case yesterday, where a landlord says she chose do herself work that, based on the time she says she spent, should have gone to a contractor.

The tax law says real estate losses are normally “passive,” and when adjusted gross income exceeds $150,000, they are only deductible to the extent of other passive income.  A special rule lets “materially participating real estate professionals” out of the “per-se passive” rules; these taxpayers test whether their real estate activity is passive under the rules that apply to other business activities, based on time spent.

There’s a serious catch.  To qualify as a real estate pro, you have to work at least 750 hours in real estate, and more hours than in anything else you do.  If you have a full-time day job, this doesn’t work.

20140325-1But taxpayers attempting to get to 750 hours might be tempted to do work they would otherwise outsource.  That would be the generous interpretation of these facts in the Tax Court (my emphasis):

Petitioner claimed to have spent a total of 772 hours working on her rental properties in 2009. In support of her assertion, petitioner provided activity logs purporting to document the time she spent on her rental activities. Some of the activities included painting, cleaning apartments, shoveling snow, communicating with tenants on various issues, placing rental ads in the local newspaper, picking up mail, and paying bills. Although some log entries reference a specific apartment or property, many log activities do not specifically identify a particular rental unit. In addition, the number of hours noted on petitioner’s logs appears to be significantly inflated. For example, in one instance petitioner claims to have spent 8 to 12 hours per day for 10 days staining the “deck and siding” of what appears to be one apartment at the Pulaski property.

Some people just are perfectionists.

The log also indicates that [petitioner's husband] helped stain the deck and siding on those dates. In that instance, petitioners together spent between 160 to 240 hours staining the deck and siding of one apartment. There are several other instances in 2009 where petitioner claims to have spent many hours staining and painting decks and front porches of the rental properties. Petitioner’s log for July 2009 indicates that she spent approximately 77 hours over an eight-day period to paint a back porch. Petitioner’s log for November 2009 indicates that she spent more than 105 hours over a 12-day period on the flooring for one apartment and that on one specific day she worked 16 hours.

While a misguided attempt to reach 750 hourse might have motivated this sort of effort, the judge decided that something else was going on:

 Although petitioner claims she acted reasonably and in good faith with respect to her position that she was a real estate professional in the years in issue, we have concluded that petitioner’s records are not accurate or reliable and likely inflated the hours she spent in real estate activities. We have also concluded that the logs relating to her activity as an employee and her self-employment were not accurate.

If you want to document time for showing an activity is non-passive, it is wise to track it in a daily contemporaneous calendar.  It is also wise to not push the limits of believability.

Cite: Materano, T.C. Summ. Op. 2014-64

Material participation hours tests can be found here.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProf, The IRS Scandal, Day 428.  It features  from the Wall Street Journal U.S. Judge Orders IRS to Explain How it Lost Lerner’s Emails:

A federal judge on Thursday ordered the Internal Revenue Service to explain how it lost two years’ worth of a former official’s emails, and tapped a magistrate judge to find out whether the documents can be obtained from other sources.

At a hearing in a conservative group’s lawsuit, U.S. District Judge Emmet Sullivan gave the IRS until Aug. 10 to provide a sworn declaration explaining how the email loss occurred. The IRS previously has said that the emails were lost because the top agency official’s computer crashed in 2011, and backup tapes were routinely reused after six months.

These practices violated federal recordkeeping procedures and, likely, federal law.  In spite of Ms. Lerner’s evident concern about the possibility of  her emails being found, Commissioner Koskinen says it’s silly to think anything more suspicious than a remarkable rash of hard-drive failures is to blame.

 

A new study by the Mercatus Institute says state taxes matter.  A summary says “The study finds that higher state taxes correlate with lower economic performance, even when controlling for various factors.”  It says that higher taxes lower economic growth, affect migration patterns, and reduce business startups. (hat tip: Maria Koklanaris, State Tax Notes ($link‘))

 

Carl O’Donnell, How The $1 Billion Kennedy Family Fortune Defies Death And Taxes.  Most politicians who vote for higher taxes do so assuming they won’t have to pay them. (via the TaxProf)

 

Kyle Pomerleau, Bill to be Introduced that Seeks to Reduce EITC Payment Error (Tax Policy Blog).  Unfortunately, fraud and error are baked into this cake.  You might as well try to take the chocolate out of toll house cookies.

 

20140513-1Jim Maule continues his Tax Myth series with Tips Aren’t Taxed Because They Are Gifts.  “Most people who collect tips are paid very little, rely on the tips to make a living, and are unhappy to learn that tips are included in gross income.”

Jason Dinesen, Glossary of Tax Terms: Head of Household   

It’s Friday, it’s Buzz Day at Robert D. Flach’s place.

Keith Fogg, Revoking the Release of the Federal Tax Lien and Appointing a Receiver (Procedurally Taxing)

 

TaxGrrrl, Who Should Pay For Schools? Answer Remains Unclear As Cigarette Tax Boost On Hold   Smoke ‘em if you got ‘em.  For the children!

Renu Zaretsky,  Games, Spins, Ignorance and Patience.  Today’s TaxVox headline roundup covers, among other things,  Highway Trust Fund games, corporate inversions.

Steve Warnhoff, House Poised to Throw $276 Billion “Bonus” at Businesses.  (Tax Justice Blog).  He’d rather throw it at the government.

Kay Bell, LeBron ‘King’ James’ return to Cleveland could be a win-win for fans and the so-called Win Tax

 

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A new Cavalcade of Risk is up!  R.J. Weiss hosts this edition of the blog world’s venerable roundup of insurance and risk management posts, including Hank Stern on Kidnap & Ransom Insurance.

I’ll bet he does.  Beanie Babies creator defends sentence of probation, no prison time, for tax evasion (Brandon Sun)

News from the Profession.  Just How Many CPA Roommates Can You Fit In a Single Apartment? (Leona May, Going Concern)

 

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Tax Roundup, 6/25/14: Check your mailbox edition. And: the Commissioner’s real goal.

Wednesday, June 25th, 2014 by Joe Kristan

20120511-2Ignore them and they will come anyway.  A Chicagoan tried to avoid IRS pursuit by the simple expedient of not picking up his mail.  The Tax Court told him yesterday that doesn’t work:

 On several occasions the U.S. Postal Service (Postal Service) attempted, albeit unsuccessfully, to deliver the 2006-2007 notice of deficiency to petitioner at the address of his Columbus Drive apartment. On at least two occasions the Postal Service left notices of attempted delivery of certified mail at that address. In those notices, the Postal Service informed petitioner that it had certified mail to deliver to him and that he had to sign a receipt for that mail before the Postal Service would deliver it to him.

The taxpayer never got around to doing so. Yet he still wanted to fight the deficiencies in Tax Court:

It is petitioner’s position that he is entitled under section 6330(c)(2)(B) to contest the underlying tax liability for his taxable year 2006. In support of that position, petitioner contends that although respondent mailed to him by certified mail, return receipt requested, the 2006-2007 notice of deficiency that was addressed to his Columbus Drive apartment, he did not receive that notice within the 90-day period during which he could have filed a petition with the Court with respect to that notice. In support of that contention, petitioner relies on his testimony at the partial trial in these cases. 

There’s a 90-day deadline to file with the Tax Court, starting with the receipt of the Notice of Deficiency.  The Tax Court enforces the deadline pretty strictly.  And you can’t extend the deadline just by ignoring your mail:

On the record before us, we hold that petitioner may not decline to retrieve his Postal Service mail, when he was reasonably able and had multiple opportunities to do so, and thereafter successfully contend that he did not receive for purposes of section 6330(c)(2)(B) the 2006-2007 notice of deficiency. On that record, we reject petitioner’s contention that he is entitled under that section to dispute the underlying tax liability for his taxable year 2006.

Nice try.

Cite: Onyango, 142 T.C. No. 24.

 

Paul Neiffer, Is Low Section 179 Causing Low Equipment Sales?

 

Mixed message.   From Tax Analysts ($link): “Taxpayers considering the IRS’s new streamlined filing compliance program need to think carefully about whether their actions were truly non-willful, because a certification that proves untrue could expose them to more charges from the Justice Department, Kathryn Keneally, former assistant attorney general for the DOJ Tax Division, said June 24.”

The Treasury just can’t quite get the hang of this.  What taxpayers need is bright-line guidance that lets them come into compliance, at least below a relatively-generous dollar threshold.  Instead they have to come in with their hands up, while the IRS reserves the right to open fire — to second guess their state of mind.  That’s not necessarily very comforting.

 

 

Rose Mary Woods checks her e-mail in the Nixon administration.

Rose Mary Woods checks her e-mail in the Nixon administration.

Howard GleckmanThe Real IRS Flap Is About Dark Money, Not Emails (TaxVox):

But get past the shouting and two very important issues remain on the table: The first is the IRS has been terribly managed for years and needs to be fixed. It’s easy to forget, but that’s why Koskinen is there.

The second is that the commissioner appears undeterred in his efforts to rewrite the rules for 501(c)(4) non-profits that are engaged in political activities. That seemingly obscure effort will have an enormous impact on future U.S. elections and the balance of political power in the U.S.

This is chilling.  And Mr. Gleckman seems to think it’s just an effort by a disintersted public servant to impose order on chaos:

Koskinen is under great pressure from liberal and conservative groups and from lawmakers on both sides of the aisle to abandon the effort. Don’t for a minute think that the House’s proposed $300 million cut in the IRS budget, its endless requests for IRS documents on multiple subjects, and even the email hearings themselves are not in part an effort to sink—or at least slow–these regulations.

Yet, Koskinen has refused to blink.

If you think Koskinen isn’t a partisan operative at the IRS, you haven’t been paying attention.   All of the pressure to “reform” the (c)(4)s has come from the left.  And it’s clear from the Tea Party targeting that the IRS can’t be trusted to regulate political actors evenhandedly.  If Mr. Gleckman is right, Koskinen’s mission is not to help the IRS to recover from its scandalous practices, but to institutionalize them.

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProf, The IRS Scandal, Day 412.  About 40 links today, primarily on Commissioner Koskinen’s appearance before Congressional investigators and related missing e-mail developments.  It’s hard to imagine how this Commissioner could do a worse job at coming clean and improving IRS relationships with GOP congressional appropriators.

Jonathan Adler, IRS agrees to pay non-profit group $50,000 for unauthorized release of tax return.  But nobody will lose their job, and the $50,000 won’t come out of any individual perpetrator’s pocket.  In fact, the leaker gets to maintain his/her anonymity, and presumably employment too.  And even though it was an illegal, and presumably partisan, disclosure of taxpayer information, the Justice Department isn’t going to investigate.

TaxGrrrl, Lois Lerner And The Case Of The Missing Emails.  “Yes, that’s right: the IRS used the same backup strategy for its important data that I used to record my soap operas in college.”

Russ FoxKoskinen Channels His Inner Nixon. “The IRS continues to look hyper-partisan, and that’s not a good thing for anyone.”

The Hill, Archives official: IRS didn’t follow law on missing emails.   But Commissioner Koskinen says no apologies are in order, so stop bothering him.

 

No Walnut STAccounting Today, AICPA Says IRS Voluntary Tax Preparer Certification Program Is Unlawful:

The AICPA’s letter emphasizes the following points:

• First, no statute authorizes the proposed program;

• Second, the program will inevitably be viewed as an end-run around Loving v. IRS, (a federal court ruling rejecting an earlier IRS attempt to regulate tax return preparers);

• Third, the IRS has evidently concluded, in developing the proposed program, that it need not comply with the notice and comment requirements of the Administrative Procedure Act. This is incorrect; and

• Finally, the current proposal is arbitrary and capricious because it fails to address the problems presented by unethical tax return preparers, runs counter to evidence presented to the IRS, and will create market confusion.

Not that being illegal will bother them; see above.

 

Arnold Kling, In Our Hands.  Mr. Kling discusses his idea for replacing all means tested welfare programs like the Earned Income Credit with a universal voucher: “Keep in mind that under current policy, many low-income households face effective marginal tax rates of 100 percent or higher. That is, they are better off with something less than full-time, year-round work.”

 

David Brunori, A Bad Law Addressing a Bad Business Tax (Tax Analysts Blog)

Local option business taxes, whether imposed on income, gross receipts, or personal property, are terrible ways to raise revenue. Only 14 states authorize their use, and they raise a paltry sum compared with the property tax or even local option sales and income taxes. Virtually all the public finance experts who have studied the issue denounce their use.

Of course, Iowa has lots of these.

 

20120606-1Sydni Pierce, Congress, Take Note: More States Are Reforming Antiquated Fuel Taxes This Summer (Tax Justice Blog)

Andrew Lundeen, Obamacare Increases Marginal Tax Rate on Labor by Six Percentage Points (Tax Analysts Blog).   “In the case of the Affordable Care act, Mulligan is talking about implicit marginal tax rates, or ‘the extra taxes paid, and subsidies forgone, as the result of working.’”

 

Adrienne Gonzalez, Bernie Madoff’s Former Accountant Pleads Guilty But Clueless (Going Concern).  “Prosecutors say that Konigsberg didn’t intend to help defraud Madoff investors, but knowingly used fraudulently backdated trades provided by Mr. Madoff’s firm as he prepared tax returns for some clients’ investment account.”

 

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Tax Roundup, 5/13/14: UPS Ground grounds late filer. And: how “voluntary” would “voluntary” preparer regulation be?

Tuesday, May 13th, 2014 by Joe Kristan

UPS 2nd-dayUPS Grounded.  E-filing is the best way to make sure your filing is timely, but sometimes it’s just not available.  If you do an old-fashioned paper filing, you can rely on the “mailbox rule,” which says that a tax filing postmarked by the deadline is considered filed on-time.  The mailbox rule used to only apply to returns sent via the U.S. Postal Service, but the IRS expanded it to private carriers like UPS and Federal Express. The availability of private delivery services for timely last-minute filing has been a boon to procrastinators.  Few post offices stay open late anymore to receive last-minute tax filings, but there are 24-hour FedEx and UPS stores.  Unfortunately, the IRS rules on private delivery services are tricky, and they tripped up one taxpayer in Tax Court yesterday. The IRS lists qualifying private delivery services in Notice 2004-83.  The notice identifies specific services for DHL, UPS and FedEx that qualify for the mailbox rule.  The UPS services that qualify:

UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

The taxpayer in yesterday’s case sent his package via UPS Ground, and while sent before the 90-day deadline for Tax Court filings, it arrived after the deadline.  The Tax Court said that didn’t work:

 UPS Ground has not been designated by the Commissioner as a private delivery service. Notice 2004-83, supra. Thus, the timely mailing/timely filing rule of section 7502 does not apply to “UPS Ground” service… In so holding we acknowledge that the result may appear harsh, notwithstanding the fact that petitioner had nearly 90 days to file his petition but waited until the last moment to do so. However, the Court cannot rely on general equitable principles to expand the statutorily prescribed time for filing a petition.

The Moral?  If you use a private delivery service, make sure you use one that qualifies.  If you are filing with an IRS service center, be sure to use the correct street address, as the private delivery services can’t deliver to the service center post-office box addresses.

Cite: Sanders, T.C. Summ. Op. 2014-47

 

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProfThe IRS Scandal, Day 369.  This edition links to the TaxProf’s own USA Today piece, The Media Ignore IRS Scandal:

Today’s news media are largely ignoring the IRS scandal, and it is impossible to have confidence in the current investigations by the FBI, Justice Department, and House committee. I am not suggesting that the current scandal in the end will rise to the level of Watergate. But the allegations are serious, and fair-minded Americans of both parties should agree that a thorough investigation needs to be undertaken to either debunk them or confirm them. Step one should be to give Lois Lerner full immunity from prosecution in exchange for her testimony. And then let the chips fall where they may.

True all around.   Journalists don’t care to investigate their own team.

 

Leslie BookABA Tax Section Procedural Highlights and Cohen APA Teaser:

Even without legislation, OPR Director Karen Hawkins stated that IRS will take a narrow interpretation of Loving insofar as it relates to its ability to regulate practitioners. As to the policy relating to regulating preparers, Director Hawkins announced that IRS will soon begin a voluntary testing and education plan that will provide some benefits to preparers who opt in to a regulatory regime.

What does it take to teach some people?  You got whipped, IRS.  The courts ruled that you grossly overreached.  How do you find a “narrow interpretation” of that?  It sounds to me like they will make their new program “voluntary” in the same way the national accounting firm I used to work at made United Way contributions “voluntary” —  they always had 100% participation.

 

Russ Fox, Florida Doctor Does Much Wrong on her Way to ClubFed:

She (and allegedly her husband) created nominee accounts at UBS and other foreign banks; of course, that income didn’t find its way to her tax return. Her half of the sale of the medical schools also didn’t find its way to the tax return. Those nominee accounts were at foreign banks; she didn’t file a Report of Foreign Bank and Financial Accounts (FBAR). And the money was used for conspicuous consumption: an airplane and three homes.

If you cheat on your taxes, it’s not wise to call attention to your wealth.

 

Wikipedia image

Wikipedia image

Jack Townsend, When is Booker Variance Too Much? Per DOJ, Certainly in the Ty Warner Case.  “What I draw from the sentence is that, when the hypothetical client is in the criminal cross-hairs asks the hypothetical reasonably welleducated and experienced criminal tax attorney with good judgement whether he [the client] will be treated as well as Ty Warner, the right answer is likely to be: ‘You’re not rich enough to get that quality of justice.’ “

 

Janet Novack, Prosecutor: Beanie Babies Billionaire Tax Cheat Didn’t Deserve `Get-Out-Of-Jail’ Card 

 

TaxGrrrl: What If Congressional Elections Were Run Like The NFL Draft?.  Well, a large percentage of football players are broke within three years of being drafted.  I’d favor that for congresscritters.

Kay Bell, IRS getting sneakier in tracking tax cheats.  ” If you’re bragging on Facebook about buying a Ferrari but reporting only $30,000 in annual income on your Form 1040, your social media comments will probably prompt the IRS to take an interest in you.”

 

It’s Tuesday Buzz-time!  At the Robert D. Flach emporium.

20140513-1

Lyman Stone, The Facts on Interstate Migration: Part One (Tax Policy Blog):

CBPP’s new report says that “State taxes have a negligible impact on Americans’ interstate moves,” and so falls pretty comfortably in the “taxes don’t affect migration” camp.What we’ve consistently argued at the Tax Foundation is that taxes matter on the margin, but that they’re just one of many factors. After reviewing Mazerov’s main arguments, this theme will be apparent: that his analysis doesn’t address the effect of taxes on the margin.

Any practitioner has dealt with cases where taxes do make a difference where people choose to live.  It’s painfully obvious when you live in a high-rate state with a zero-rate state (South Dakota) next door.  And to assume taxes don’t matter is to assume incentives don’t matter, which is like assuming gravity doesn’t hold things down.

Renu Zaretsky, Pizza, Expats and Drugs.  The TaxVox headline roundup covers today’s expected senate vote on extenders, take and bake pizza, and the high costs of FATCA for foreign companies who hire Americans abroad.

 

That’s clupeida roseus to you, Judge. States’ Failed Tax Policies Have Some Governors Throwing Red Herrings (Tax Justice Blog). 

Career Corner.  Helicopter Parents are Hitting Alumni Groups on LinkedIn to Find Junior a Job Now (Going Concern)

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Tax Roundup, 5/8/14: No, Virginian, there is no travel expense Santa Claus. And more!

Thursday, May 8th, 2014 by Joe Kristan

20120801-2News Flash: Tax Court Judges didn’t just fall off the turnip truck.  That insight might have occurred to a Virginian after yesterday’s Tax Court decision denying $64,775 in 2010  “car and truck expenses” for a “mobile advertising business” that grossed $7,200 in revenue.

The Virginian worked full-time for Verizon while traveling up a storm — 129,550 miles in 2010, by his own account.  Special Trial Judge Dean questioned The Virginian’s work ethic (my emphasis):

The number of hours petitioner worked for Verizon and purportedly drove for his mobile advertising business simply strains credulity. Petitioner’s monthly mileage for 2010 ranged from 7,419 miles to 17,864 miles. Petitioner testified that he drove at approximately 60 miles per hour. If it is possible that he could average 60 miles per hour in the month that he drove 17,864 miles, he spent at least 300 hours on the road that month or almost 10 hours a day. All this while working full time for Verizon.

The judge also has doubts about the business model:

Furthermore, petitioner’s extensive driving does not appear to be ordinary and necessary to his mobile advertising business. Petitioner claims that he drove all over the United States to post fliers and to advertise his own mobile advertising business, even though most of his clients were local clients except one online refinancing company. All the while, petitioner had very little income in relation to the excessive costs he incurred driving to put up flyers. Furthermore, the advertising for his own business appeared to be fruitless, as he never made a profit in any of the six years he engaged in the business, despite incurring great costs traveling to advertise mobile advertising business.

20140508-2But ultimately none of that mattered, because The Virginian failed to cross the initial threshold for deducting any sort of travel expenses — Section 274:

Notwithstanding whether petitioner’s excessive driving was ordinary and necessary for his mobile advertising business, he simply did not satisfy the strict substantiation requirements of section 274(d) for claiming car and truck expenses… Petitioner had no backup receipts and no beginning and ending mileage for the automobile he allegedly used. 

Section 274(d) requires taxpayers to document travel expenses “by adequate records or sufficient evidence”

-the amount of expense,

-the time and place of the travel, and

-the business purpose of the trip.

For travel, that means receipts where possible (e.g., hotels), and contemporaneous calendars or logs documenting mileage.  Without that, your work ethic and business model doesn’t even come into play.

Cite: Abelitis, T.C. Summ. Op. 2014-44.

 

20130114-1Roger McEowen, IRS Says Agents Acting Under Power of Attorney Subject to FBAR Reporting.  “The agent (along with the principal) is subject to the FBAR filing requirements if the POA gives the agent signature authority over a foreign account that exceeds the dollar threshold.” 

 

TaxProf, The IRS Scandal, Day 364.  Big day tomorrow.

TaxGrrrl, UPDATED: Timeline Of IRS Tax Exempt Organization Scandal.  It started with a planted question to try to blunt the impact of the impending TIGTA report that pointed out the targeting.

Kay Bell,  Lois Lerner held in contempt of Congress, ramping up next phase of midterm election year political posturing.  Yes, posturing is occurring — that’s what politicians do.  But Sam Ervin’s posturing — and he did his share — didn’t make Watergate less a scandal.

 

Cara Griffith, Transparency Versus Disclosure of Taxpayer Information (Tax Analysts Blog)  “…the disclosure of documents that contain taxpayer information, whether required by state law or the result of litigation, does not encourage transparency in tax administration.”  I agree; unfortunately, the IRS hides behind dubious assertions of confidentiality to cover up its own questionable behavior.

 

Jason Dinesen, Hold the Phone on the IRS E-file Outrage Machine.  No, don’t.  It’s still outrageous.

20140508-1Peter Reilly, Nonrecognition On Divorce Transfers Hurts Receiving Spouse .  It did in this case, when the recipient spouse had to pay tax.   Taxpayers receiving property in divorce receive the other spouse’s basis, and the other spouse doesn’t have a taxable sale.  But it’s still good policy.  Property settlements are contentious enough without hitting somebody giving up property with income tax on that dubious privilege.  Also, if the IRS got a cut, there would be less marital property to split in the first place.

Alan Cole, Failing by its Own Standard: What DC’s Insurance Tax Tells Us About its Obamacare Exchange (Tax Policy Blog)

Tax Justice Blog, What’s the Matter with Kansas (and Missouri, and …). “An anti-tax, Republican super majority in the Missouri Legislature claimed victory yesterday in a year-long battle with Gov. Jay Nixon over taxes by voting to override Nixon’s veto of a $620 million income tax cut.”

Do tell.  California Legislative Analyst’s Office Raises Concerns with Film Tax Credits (Lyman Stone, Tax Policy Blog).

Renu Zaretsky rounds up tax headlines for TaxVox with Contempt, Audits, Health Care, and Highways.

Janet Novack, Mansion Tax Kills Some Million Dollar Home Sales, Study Concludes.  Taxes always matter.

Jack Townsend, Another Foreign Account Sentencing.

 

Quotable:

The practice of regularly renewing the extenders package is unfortunate and should be stopped. It distorts the budget process, encourages legislative rent seeking, and invites highly particularistic legislative provisions that are better characterized as windfalls and wasteful government spending rather than well-targeted tax incentives.

Victor Fleischer,  Tax Legislation in the Contemporary U.S. Congress (Via the Taxprof)

News from the Profession: Grant Thornton Tries to Motivate With the Human Centipede, or Something (Going Concern)

 

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Tax Roundup: April 30, 2014: Force of nature edition. And: Extenders move in U.S. House.

Wednesday, April 30th, 2014 by Joe Kristan

Iowa 1040s are due today!  If you are 90% paid in, they extend automatically with no filing.  If you need more time and need to pay in something, use IA 1040-V.

 

20130113-3House votes to make permanent six “expiring” provisions.  The House Ways and Means Committee voted to permanently extend six of the perpetually-expiring tax breaks that Congress renews every year or two.  They include:

  • A simplified version of the research credit
  • The five-year built-in gain tax recognition period for S corporations
  • The $500,000 Section 179 deduction limit
  • A provision reducing the net basis reduction for S corporation donations of appreciated property to the basis of the property.

The committee also voted for two international extenders.

The votes were mostly along party lines, which means they are unlikely to be passed in this form by the Democratic-controlled Senate. The Senate Finance Committee has already approved its own temporary extender package, and my guess is the final extenders package will look like the Finance Committee bill.

Tax Analysts reports ($link) that the committee isn’t done with extenders, but it isn’t clear when it will look at Bonus Depreciation.

The “no” votes for the House package objected to the lack of offsets to the revenue “lost” by the package.   I’m less upset.  While I oppose the research credit on principle, these provisions are permanent anyway; the whole “extender” process is a sham, conducted only to pretend that the tax breaks aren’t permanent so they “cost” less under Congressional accounting rules.  It’s the sort of thing that would be a felony in the private sector, but just another day for our leaders.  At least the House bill drops the pretense that these things won’t get passed every time they expire.

 

Additional coverage available at Accounting Today.

Related:

Tax Justice Blog, Rep. Dave Camp’s Latest Tax Gambit Is “Fiscally Irresponsible and Fundamentally Hypocritical”

Clint Stretch, Dreams of Tax Reform (Tax Analysts Blog)

 

 

20130117-1No gas tax boost this year.  Sioux City Journal reports that a last-gasp attempt to boost Iowa gasoline taxes died last night as the General Assembly continues its pre-adjournment frenzy.

 

David Brunori, Sad Pragmatism and Tax Incentives (Tax Analysts Blog).  “If tax incentives are an unavoidable reality, we should make them as transparent and accountable as possible.”  True, but that doesn’t excuse the politicians who take your money and give it to their special friends.

 

The Iowa State University Center for Agricultural Law and Taxation has released its 2014 summer seminar schedule.  It includes a slate of webinars on topics from Ethics to ACA mandates.  There will also be two big out-of-town events, in West Baden Springs, Indiana, and West Yellowstone, Montana.  I’m not able to participate this year, but they are a hoot and a great learning experience.

 

TaxGrrl, Widow Loses House Over $6.30 Tax Bill.  “A Pennsylvania woman has lost her home for little more than the cost of a Starbucks Frappuccino.”  The law in all its majesty.

Kay Bell, File IRS Form 1040X to correct old tax mistakes

Peter Reilly, Graduation Contingency Kills Alimony Deduction.  It’s very easy to screw up an alimony deduction with bells and whistles, as Peter explains.

 

20120531-1Jason Dinesen, Preparer Regulation and Judging Preparers Based on Size of Refund.  “Anyone who’s worked in this business has experienced the irate client who thinks the preparer screwed up because their refund was less than their friend/co-worker/hair dresser, etc.”

 

TaxProf, The IRS Scandal, Day 356

Jack Townsend, U.S. Congressman Indicted for Tax Related Crime

Joseph Thorndike, Airlines Say Ticket Taxes Would Be More Visible if They Were Better Hidden (Tax Analysts Blog)

Alan Cole, What Gift Cards Can Teach Us About Tax Policy (Tax Policy Blog)

Renu Zaretsky, Funding Tax Breaks, the IRS, and Public Pensions, Safety, and Schools.  The TaxVox headline roundup.

 

News from the Profession.  EY Is Tackling the Important Issue of Dudes’ Need for Flexibility (Going Concern)

 

Clear error is a standard used by appellate courts to review some lower court decisions.  A Tax Court case decided by Judge Paris dealing with horse losses yesterday involved purported destruction of records by an old girlfriend.  Here’s where the clear error comes in:

The wrath of a former girlfriend may be a formidable force, but it is not analogous to a hurricane-like natural disaster, and it does not constitute a reasonable cause outside petitioner’s control.

I’ve met Judge Paris, and I strongly suspect she’s never dealt with a bitter former girlfriend. Anyone who has would never have written such a thing.  But as she pointed out that the petitioner provided no evidence that such destruction occurred, so you oughta know that the case probably still is on solid ground.

 

Cite: Roberts, T.C. Memo 2014-74.  Additional coverage from Paul Neiffer, Partial Taxpayer Victory on Horse Farm Case

 

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Tax Roundup, 4/24/14: A(m)way to deduct your car? And: shame on you for doing my bidding!

Thursday, April 24th, 2014 by Joe Kristan

logoamwCan an Amway distributorship ever be taxed as a legitimate business?   It must be possible, but I’ve yet to see one win in Tax Court.  A case decided this week illustrates common tax problems seen with “downline” folks involved in Amway and other multi-level marketing ventures.

A doctor and his wife got involved with Amway, an MLM operation that sells household, nutritional and cosmetic products.  In addition to the medical practice income, they reported Amway results on a Schedule C.  We can guess from the results how they attracted IRS notice:

20140424-1

The Tax Court case involved their 2009 tax year.  Here are the expenses that went into their 2009 loss:

 

20140424-2

For some reason the IRS questioned the need for $25,000 in vehicle and travel expenses to sell stuff out of their home.  The tax law’s Section 183 “hobby loss” rules prohibit deductions in excess of income if the business isn’t conducted for profit.  The courts have developed a set of factors to evaluate in determining a taxpayer’s intent.  Tax Court Judge Guy went down the list, including:

Manner in Which Petitioners Carried On the Amway Activity

Although petitioners kept records of their Amway expenses, they did not use those records to analyze their business performance or to prepare profit projections, a break-even analysis, or a formal budget. Despite several years of activity during which they realized cumulative net losses of $192,427, petitioners failed to make any meaningful change in their strategy or tactics in an effort to increase the likelihood of earning a profit. On this record, it is a fair inference that petitioners used their records only to compute the amounts of losses attributable to the Amway activity when preparing their tax returns. Considering all the facts and circumstances, we conclude that petitioners did not conduct the Amway activity in a businesslike manner.

And:

Petitioners’ History of Income or Loss

 At the time of trial petitioners had never reported an annual profit in respect of the Amway activity. To the contrary, they reported cumulative net losses of $192,427 from 2005 through 2011. The modest gross receipts that petitioners derived from the activity have been eclipsed by the substantial expenses they incurred over the years. Although petitioners testified that they believe the Amway activity will eventually generate profits, we cannot discern on this record any definitive trend to the upside for petitioners, and there certainly is no indication that they are on their way to the level of profitability that would allow them to recoup the substantial cumulative losses they have incurred to date. In sum, petitioners’ history of consistent and substantial losses is indicative of a lack of profit objective.

I avoid multi-level marketing clients because their “profit” so often comes from putting personal expenses on Schedule C.  It sure seems that way here.

The Tax Court declined to impose penalties, citing taxpayer maintenance of good records and reliance on a CPA to prepare their returns.  Considering that the Tax Court has upheld penalties for taxpayers who are more sympathetic than a doctor deducting his car, it’s somewhat surprising.  It shows that even if you can’t show a profit motive, using  good records and a preparer can at least help avoid penalties.

Cite: Mikhail, T.C. Summ. Op. 2014-40

 

For a recent taxpayer victory on a hobby loss case, see Peter Reilly’s Horse Breeder/Lawyer Wins In Tax Court. Was It Worth It? 

 

20120906-1Special favors for special friends. Senate sends governor a bill containing tax break for Knoxville Speedway. (O. Kay Henderson).  Iowa’s long-time sprint-car track gets a special deal to keep sales tax it collects, like the NASCAR track in Iowa.  Meanwhile, everybody else competing for Iowa entertainment dollars has to remit to the state the sales taxes they are required to collect.  Sweet deal, when you have the pull.

 

Iowa WatchdogIowa congressman urged IRS to investigate nonprofits:

Four days after the head of the Internal Revenue Service denied the agency was targeting conservative social welfare organizations applying for tax exempt status, Rep. Bruce Braley signed a letter urging a probe into the political activities of social welfare organizations.

Braley was one of 30 Democratic members of Congress who signed the letter, dated March 26, 2012, to IRS Commissioner Douglas Shulman urging him to investigate whether “any groups qualifying as social welfare organizations under section 501(c)(4) of the federal tax code are improperly engaged in political campaign activity.”

It’s funny how so many folks who urged the IRS to get all political on their opponents now deny it did any such thing.  Mr. Braley takes a different approach:

In May 2013, Braley called the IRS targeting of conservative groups “shameful,” saying “there is no place for politics at the IRS.”

Shame on you for doing what I told you to do!

 

20140401-1Paul Neiffer, Social Security Drops Efforts To Collect Old Debts From Children of Debtors. Maybe.

Kay Bell, Got debts? They could eat into your tax refund

Keith Fogg, Collection of Restitution Payments by the IRS (Procedurally Taxing)

Jason Dinesen, Is it Okay for Clients to Text a Professional Service Provider?   Not if they don’t have your cell phone number!

Jack Townsend, Crossing the Line in Tax Planning:

I report today on a civil case that shows how a civil dispute can involve a situation that perhaps should have been a criminal case… Essentially, the taxpayers created a paperwork façade to give the appearance of qualifying for the [first-time homebuyer] credit, but the facts outside the paperwork showed that they did not qualify.

You see a lot of that with refundable credits.

 

 

Andrew Lundeen, How High Investment Taxes Contribute to Inequality. (Tax Policy Blog)

William Perez, Tax Reform Act of 2014, Part 6, Retirement Plans

Cara Griffith, Solving the ‘Problem’ of Remote Sales (Tax Analysts Blog). “All things being equal, I would rather enforce the use tax than needlessly broaden the sales and use tax nexus standard.”

Tax Justice Blog, Missouri Lawmakers Relentless in Quest for Tax Cuts for the Wealthy.  In Iowa, we prefer to do favors for the well-connected, rich or poor.

TaxProf, The IRS Scandal, Day 350.  Includes a link to Bruce Braley Urged IRS to Target Groups Before IRS Targeting Scandal Emerged.

Me: HSA Contribution Max for 2015 $3,350 single, $6,650 family.

KSDK.com: Man swallows 12 gold bars to evade taxes.  Sometimes you can actually feel sorry for the tax collector.

Career Corner.  Judge: Talking dirty not reason enough to lose job (Des Moines Register)

 

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Tax Roundup, 4/21/14: Clearing the wreckage edition. And: Tax Court penalty abuse.

Monday, April 21st, 2014 by Joe Kristan

20140330-2So I took a five-day weekend.  I needed the sleep, and to see something besides the office, my bed, and my commuting route.  So now to clear the debris of the last few weeks from my desk, and my email inbox.

And I come back to see perhaps the dumbest thing ever to come out of the Tax Court.  Janet Novack reports:

“Taxpayers rely on IRS guidance at their own peril,” Judge Joseph W. Nega wrote in an order entered  on April 15th —an order denying a motion that he reconsider his earlier decision to penalize tax lawyer Alvan L. Bobrow for making an IRA rollover move that IRS Publication 590,  Individual Retirement Arrangements (IRAs), says is allowed.

Which is more astounding: he IRS decision to seek penalties against a taxpayer for following IRS guidance, or the Tax Court going along?  A great deal of what we do as professionals, and what taxpayers do, is in reliance on IRS guidance, because often that’s all there is to go on.  If you can get hit with a penalty for following IRS guidance if the IRS changes its mind, we’re all avoiding disaster only as long as the IRS is in a good mood.

This unwittingly goes to the heart of the IRS non-enforcement of the Obamacare employer mandate. The statute provides that the penalty tax on those with 50 or more employees starts this year if they fail to provide specified health insurance.  Nothing in the statute provides otherwise.  The only thing standing between all these employers and massive penalties is IRS guidance — y0u know, the guidance that Judge Nega just said taxpayers rely on “at their own peril.”

The whole Tax Court should reconsider this order.  If they decide that something that stupid really is the law, Congress should reverse with legislation providing that taxpayers relying on written IRS guidance should never be penalized for it.

 

20130419-1Megan McArdle kindly linked to me last week in You Can’t Fight the IRS – specifically, to Tax season tip: when you owe and can’t pay.  She added some thoughtful commentary, including:

 There are basically three types of tax trouble. There is “I was underwithheld at work because my salary changed over the course of the year but didn’t realize it” or “I’m a freelancer or small-business owner, and I forgot to put away enough money for taxes, or I incorrectly estimated what my tax bill would be.” Then there is “I am a small-business owner or otherwise self-employed, and I am on the brink of financial collapse; the money with which I hoped to pay the taxes had to go to keep my creditors (barely) at bay.” And, of course, though I hope this is not you, there is “I have been cheating on my taxes.”

She notes that different troubles require different solutions.

Thanks to her link, and to one from Instapundit to the same post, last week was the busiest around here all year.  My thanks to them, and to everyone who takes the time to link here.  You rock my little world.  If you ever want to link to just a piece of a Tax Roundup, you can do so if it starts in blue bold letters, like the words “Megan McArdle” at the beginning of this segment.

 

While I was too busy to do Tax Roundups at the end of tax season, I missed some excellent Bozo Tax Tips from Russ Fox, including Bozo Tax Tip #1: The Eternal Hobby Loss

 

Greg Mankiw,Transitory Income and the One Percent:

It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution….  

-Quoting a NY Times article by Mark Rank

Occupy… yourselves!

 

Jason Dinesen, Another Tax Season Down — 2014 Tax Season Recap 

Paul Neiffer, Another Tax Season Bites the Dust.  “This year was actually much easier on myself and I think most of my compatriots since we did not have Congress passing a tax bill on the last day of the year to mess up the IRS computers (although the computers have other issues to deal with).”

TaxGrrrl, IRS Reports Tax Filing Numbers As Expected, Issues Statement On Refund Delays 

Robert D. Flach, THAT WAS THE TAX SEASON THAT WAS.  “43 down – 7 to go!”  I hope to stop before 43, myself.  Robert is tougher than I am.

In case you missed it, you can see my April 15 interview with local TV station KCCI here.

 

 

Locust Street, Des Moines

Locust Street, Des Moines

Tony Nitti, Tax Geek Tuesday: Tax Planning For Mergers And Acquisitions, Part I.  “…if we spend the time necessary to uncover and understand our clients’ non-tax and tax goals, we will typically find that choosing an ideal transaction structure is largely a process of elimination, and when the dust settles, there will often be only one option that works.”

Peter Reilly, Sawyer Taxi Heirs Midcoast Fortrend Deal – Could Have Been Worse.  It involves a C corporation attempting to have its cake while eating it too, by paying stock-deal tax on an asset sale.

Christopher Bergin, Tax Day – It Just Isn’t Fair (Tax Analysts Blog)  “I suppose the only good news is that in the last several days, there have been dozens of items in the news reporting that the IRS is doing fewer audits.”

Tax Justice Blog, Partners in Crime? New GAO Report Shows that Large Corporate Partnerships Can Operate Without Fear of Audits

Kyle Pomerleau, Why Many People are Wrong about Executive Pay and the Corporate Tax Code.  “A neutral tax code that properly defines business income would place no restriction on how much a business can deduct in compensation.”

Howard Gleckman, If Congress Lets Firms Expense Investments, It Should Take Away Their Interest Deduction.  Fine, if you let them deduct dividends.

 

Going Concern, Utah Man Discovers Liberty Tax Not as Effective as Maury Povich in Determining Paternity.

 

 

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Tax Roundup, 4/11/14. Why we extend. And: Tax Doctor, Tax Fairy?

Friday, April 11th, 2014 by Joe Kristan

4868Some folks just don’t like extensions.  Maybe they want their refund NOW.  Maybe they have never extended their return before, and they think it is somehow against the rules.  Some people believe an extension invites the IRS to come in and audit them.  And some people think they are just so special that they can bring in a complex return missing K-1s on April 10th and the preparers should just drop everything and get them filed somehow.

There isn’t much to do for the last category, except perhaps medication, or a thrashing by a crazed sleep-deprived preparer, but for more sensible folks, a basic understanding of extensions might help.

Extensions aren’t against the rules; the rules specifically provide for them.  Even in simpler times, tax administrators knew that it isn’t always possible for a busy person to put together all of the pieces of a tax return by April 15.

You still should pay up.  While extensions give you more time to file your tax return, they don’t give you extra time to pay.  The tax law asks you to estimate your tax liability and penalizes you  if you don’t have at least 90% of your taxes paid in by the April 15 deadline; the penalty is 1/2 percent per month.

Why bother with an extension if I can’t delay payment?    Probably the most important one is that if you are short of cash, the penalty for late payment on a return that you didn’t bother to extend is 5% per month — ten times the penalty for late payment on an extended return.  It forces you to at least take a stab at guessing your liability, helping you identify what pieces you have to gather to complete your extended return.  It also keeps you in compliance, and once you stop filing on time, it can be a hard habit to break.

But won’t it get me audited?  There’s no evidence that an accurate extended return filed during the extension period is any more likely to be audited than it would be filed on April 15.  The IRS selects returns based on what’s on them, now on whether they are extended.

There’s plenty of evidence that returns with errors are more likely to get extra IRS attention.  A return thrown together at the last minute is more likely to have errors than an extended return done during normal working hours by somebody who’s had some sleep.    For what it’s worth, I have extended my own return every year since 1991 with no IRS examination (knock wood).

Efile logoEfile logoe-file logoHow do I extend?  You file Form 4868 either on paper or electronically, along with any necessary payment, by April 15.  The IRS has more details here. It’s common to pay in enough to also cover your first quarter estimated tax payment with the extension.  It gives you some cushion in case you find more 2013 income while completing your return, and you can apply your return overpayment to your  2014 estimated tax when you do file your 2013 1040.

States have their own rules.  Iowa automatically extends your return without the need to file an extension form if you are at least 90% paid-in by the April 30 due date.  If you need to send them some money to get to 90%, you send it with Form IA 1040-V.

Our series of 2014 Filing Season Tips goes right through April 15.  Check back tomorrow for another one!

Russ Fox, Bozo Tax Tip #3: Be Suspicious!

 

tax fairyBelief in the Tax Fairy peaks at tax time.  The Tax Fairy is that magical sprite who will make all of your taxes go away painlessly while your sucker friends still send checks to the tax man.  It’s amazing what Tax Fairy adherents will believe.  Consider a Californian who worked as a software consultant.  He was put in touch with a “Tax Doctor” (my emphasis):

Early in 2006 petitioner’s friends recommended that he talk to the “Tax Doctor Corporation” (Tax Doctor) operated by a person representing himself to be Dr. Lawrence Murray (Murray). Petitioner spoke with Murray and members of Murray’s staff. Petitioner’s discussions with Murray and his staff consisted mostly of “a bit of a sales pitch”. They explained how they would handle his tax return preparation, what the tax savings would be, and the “structure” they would use.

Murray proposed setting up two corporations and preparing petitioner’s individual and corporate Federal income tax returns. Murray explained to petitioner that one corporation would be “operational” and the other would focus on “management”. Petitioner was unsure at trial which corporation was the operations entity and which was the management entity. Under the agreement with Murray petitioner would pay the Tax Doctor, as a fee for setting up the structure, the amount of the tax savings generated by the use of the structure. 

What could go wrong?

His C.P.A. told him that she was willing to incorporate his business activity but she would not do what the Tax Doctor had proposed because it was very aggressive. Petitioner, despite the advice of his C.P.A., decided to accept the proposal of the Tax Doctor.

I don’t need a CPA, I have a Tax Doctor!

Petitioner filed his 2006 Form 1040, U.S. Individual Income Tax Return, showing taxable income of zero. Nev Edel, one of the corporations the Tax Doctor formed for petitioner, filed a Form 1120, U.S. Corporation Income Tax Return, for the fiscal year ending (FYE) November 30, 2007. Nev Edel reported gross receipts of $285,785, total income of $291,669, and total deductions of $295,214. The largest single deduction was $237,600 for “contracted services”. Smoge Corp., the other corporation the Tax Doctor formed for petitioner, filed a 2006 Form 1120S, U.S. Income Tax Return for an S Corporation. Smoge Corp. reported total income of $186,640 and total deductions of $188,644. The largest single deduction was $172,166 for “contracted services”.

Somehow things went awry.

Murray was prosecuted and convicted in 2010 of Federal crimes associated with the preparation of his own returns and the returns of others.

This presumably led to IRS attention to our consultant’s returns, and a big assessment.  The taxpayer tried to avoid penalties because he relied on the Tax Doctor in good faith.  The Tax Court thought otherwise:

The advice of the C.P.A., who had no financial stake in the outcome of petitioner’s return positions, should have put petitioner on notice that additional scrutiny of Murray’s advice was required.

The moral?  If your tax professional, who does this for a living, says something is bogus, they just might be right.  And there is no Tax Fairy.

Cite: Somogyi, T.C. Summ. Op. 2014-33.

 

20140411-1William Perez, Six Things to Do Before April 15th

Kay Bell, What are ordinary & necessary business expenses? It depends

TaxProf, The IRS Scandal, Day 337.  More a boatload than a smidgen today.

That’s OK, you can just send me a gift card. Christopher Bergin, The Gift That Is Lois Lerner (Tax Analysts Blog):

Something bad happened here. And however bad her behavior, the problem isn’t Lerner. The problem is a culture that allows what she did to continue and that probably allows behavior that’s much, much worse.

Andrew Lundeen, What Could Americans Buy with the $4.5 Trillion They Pay in Taxes? (Tax Policy Blog).  A nice gift card, perhaps.

TaxGrrrl, House Committee Votes To Hold Lerner In Contempt, Others Push For Criminal Prosecution

Joseph Thorndike, How Dave Camp’s Failure Might Be Michael Graetz’s Victory (Tax Analysts Blog)

Peter Reilly, Clergy Out In Force To Defend Their Housing Tax Break   

Sports Corner: David Cay Johnston vs. Tax Girl on Twitter: PLACE YOUR BETS (Going Concern)

 

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Tax Roundup, 4/4/14: Your Honor, nobody follows that law! And: extenders advance.

Friday, April 4th, 2014 by Joe Kristan

20120801-2Maybe that wasn’t the best argument, under the circumstances.  Things went badly for a California man yesterday who tried to tell the Tax Court how things work in the real world.

The man had claimed $5,309 in vehicle expenses for his real estate sales business.  Vehicle and travel expenses are subject to the special rules of Section 274, which requires corroborating records of the amount, time, place and business purpose of travel expenses.  The judge found the taxpayer’s evidence wanting (my emphasis):

Petitioner provided his 2009 Mileage Chart and Itemized Categories documents, which appear to be reconstructions asserting the places he traveled to for business and the vehicle expenses he incurred in 2009. Petitioner, however, failed to provide any corroborating receipts or other records that substantiated the statements made in these two documents. Moreover, neither document identifies a business purpose for each trip, and both fail to show mileage. (While the Itemized Categories does have a handwritten note of “mileage for 2009 11,135″, this note alone does not substantiate the mileage of each trip or show how the mileage was allocated between business and personal use.) Additionally, the 2009 Mileage Chart provides a log for only three weeks for 2009 and fails to show the amount of each trip expense. Because petitioners failed to substantiate the claimed expenses as required by section 274(d), the vehicle expense deduction must be disallowed.

The IRS asserted negligence penalties for claiming an undocumented deduction.  The taxpayer tried to tell the judge that nobody does that stuff:

Petitioner did not argue reasonable cause or good faith. Instead, petitioner argued at trial that no one keeps records in accordance with the “IRS code”.

Well, OK, then, screw Section 274!  Well, no:

That argument is unpersuasive, and the section 6662(a) penalty will be sustained.

The IRS is serious about documenting business miles.  If you have them, keep a log, a calendar, or use a smart-phone app to record the time, place, cost and business purposes of your travels as you go.  If “no one keeps records in accordance with the ‘IRS code,’” no one is going to be happy with the results when they get audited.

Cite: Chapin, T.C. Summ Op. 2014-31

 

20130113-3Tax Extenders Legislation Advances in Senate (Accounting today):

 The Senate Finance Committee voted to revive almost all of the 55 tax breaks that expired Dec. 31, providing benefits for wind energy, U.S.-based multinational corporations and motor sports track owners.

Motor sports track owners have lots of friends in high places.

It’s not just motor sports lobbyists who did will in the Finance Committee.  Almost all
“expired” provisions of this lobbyist right-to-work vehicle were renewed, including the renewable fuel credits.  The only expiring provisions that actually expire are the credit for energy-efficient appliances and a provison for oil refinery property, so there remains some lobbying to do.

But wait, there’s more!  Tax Analysts reports ($link) that this Christmas in April bill includes a provision to “expand the research credit to allow passthroughs with no income tax liability to apply the credit, up to $250,000, to their payroll tax liability.”  It also would renew the reduction of the S corporation built-in gain tax “recognition period” at five years through 2015.

While the House still hasn’t acted on any of this, the passage of all of this stuff on a bipartisan basis would seem to indicate that something like this is likely to pass.  Still, Kay Bell thinks the House tax leadership may be reluctant to follow the Senate’s lead.

The reason Congress pretends these provisions are “temporary” is that under their rules, Congress can pretend that they will only cost as much as they will cost before they are renewed again, regardless of the probability that they will be renewed forever.  It’s the kind of accounting that would get us thrown in jail if we tried it with the IRS or SEC, but it’s just another Thursday in Congress.

Link: “Summary of Modified Chairman’s Mark.”

 

20091010-2.JPGKristy Maitre, E-Filed Return Rejected at Deadline? Don’t Panic

Paul Neiffer, Patronage Dividend Notices Can Be Sent by Email or Posted to a Website

Jason Dinesen, Accounting for the Work Opportunity Credit on an Iowa Tax Return 

TaxGrrrl, Taxes From A To Z (2014): T Is For Tip Income   

Leslie Book, ACA and Victims of Domestic Abuse (Procedurally Taxing)

Russ Fox, Yes, Online Poker Players Must Pay Taxes

 

TaxProf, The IRS Scandal, Day 330

William Perez, State and Local Tax Burdens as a Percentage of Income for 2011

Lyman Stone, Missouri Senate Passes Problematic Income Tax Cut Plan (Tax Policy Blog).  “Missouri’s state Senate this week passed a $621 million tax cut including a 0.5 percentage point income tax reduction and a special carveout to deduct up to 25 percent of business income.”

Howard Gleckman, Two Ways to Fix the Corporate Income Tax: Internationalize it or Kill It. (TaxVox).  I vote “kill.”

 

There’s a new Cavalcade of Risk up!  At Insurance Writer. Don’t miss Insureblog’s contribution about how those making health care policy don’t know what they’re talking about.

 

20120906-1Corporate Welfare Watch:

Iowa city prepares to give mystery company millions. (Foxnews.com)  “West Des Moines city officials have cued up $36 million in local and state tax incentives for a company, but won’t tell its citizens who that company is.”

Iowa senator calls BS on attempt to limit tax credits for fertilizer plant (Watchdog.org)

Iowa View: From wind to solar, clean power is good for Iowa (Joe Bolkcom, Mike Breitbach).  Green corporate welfare is still corporate welfare.

 

News from the Profession: Deloitte Declares Weekends Are Not For Working, Unless You Are Working (Going Concern)

 

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Tax Roundup, 4/1/14: Two weeks to go edition. And: neglected spouses!

Tuesday, April 1st, 2014 by Joe Kristan


4868
April 15 is two weeks from today.  You should already be well along the way in getting your taxes done.  If you aren’t,  you need to get to work – and you should be pondering an extension.

Even an extension isn’t a free lunch.  As Trish McIntire explains below, extensions extend the filing deadline, not the payment deadline, so you need to have at least an idea of your current tax situation even to extend.

Start with your 2012 return.  Make sure you have all of the items you reported on that return — W-2s, K-1s, 1099s.  Then think through what might have changed since last year.  New kid?  New spouse?  Lose an old spouse?  Won the lottery?

Then pencil out a return, or hurry down to your preparer.  If your preparer tells you to extend, don’t fight it.  An extended return is not a “red flag” to the IRS.  And when figuring out how much to pay with your Form 4868, round up.  This time of year, it seems most surprises are the bad kind, so assume the worst.

 

20120511-2If you want to know what does work as a red flag for the IRS, the Tax Court yesterday had a good example:

Petitioner’s 2010 Form 1040, U.S. Individual Income Tax Return, was prepared by H and R Block. On Schedule C, Profit or Loss From Business, petitioner reported gross income of $1,274, office expense of $142, and car and truck expenses of $17,978, for a net loss of $16,846.

A schedule C with just a little income and a big loss caused mostly by car and truck expenses probably goes straight to the “audit me” bin, because the IRS knows that many taxpayers are like this one:

Although petitioner provided his 2009-10 mileage log, he nevertheless failed to provide any corroborating receipts or other records that substantiated the statements made in the log. Petitioner’s mileage log did not address the business purpose of each trip. Guessing as to where he may have gone in 2010, petitioner added the places of business travel to his log in 2012. The log was thus not contemporaneous, and the reconstruction was not reliable.

If you want to take car deductions, you need to keep track of them as you go, in a log, a calendar, or a smart-phone app.  Otherwise you, like the taxpayer in this case, won’t stand much of a chance against the IRS.

Cite: Houchin, T.C. Summ. Op. 2014-29.

 

20140401-1William Perez, Retroactive Charitable Donations for Typhoon Haiyan Relief:

Taxpayers can take a deduction on their 2013 tax return for cash donations made between March 26, 2014, and April 14, 2014, to charities providing disaster relief to areas impacted by Typhoon Haiyan.

Normally, charitable donations can be deducted only if the donation is made by the end of the year. But the recently enacted Philippines Charitable Giving Assistance Act (HR 3771) gives taxpayers the option of deducting donations for Typhoon Haiyan relief on their 2013 tax returns.

William explains what you need to do to claim the retroactive deduction.

TaxGrrrl, Taxes From A To Z (2014): Q Is For QDRO

Trish McIntireThe Annual Extension Post:

So what if you can’t get your return done in time to file by then? You can file an extension. It can be done electronically or by filing a paper Form 4868 by April 15th. And it does have to be postmarked or electronically filed by April 15th. After that time, the extension won’t help you.

Remember, an extended return does not attract IRS attention; a late or erroneous return does.

 

Kay Bell, America’s pastimes: Baseball, ballpark proposals and taxes

 

Ways and Means Chairman Dave Camp Won’t Seek Reelection (Accounting Today).  That can’t be a good sign for his misconceived tax reform plan.

Jeremy Scott, Fair Shot for Everyone’ Contains Details for No One (Tax Analysts Blog):

Setting a new low for lack of detail and specificity, Senate Democrats unveiled their “Fair Shot for Everyone” agenda last week. Only loosely a set of real proposals, the agenda is merely a series of talking points designed to distract voters from President Obama’s lagging approval numbers and the continuing unpopularity of the Affordable Care Act.

Not a glowing review.

Howard Gleckman, Should Tax Reform Be Sold on Values Instead of Economics?

 

20120906-1Paul Brennan, In Iowa, your taxes help corporations not pay theirs (Iowa Watchdog.org):

Of course, $950,000 isn’t much more than chicken feed to a company like Tyson, which posted $583 million in profits in 2013. It also doesn’t compare with the tens of millions of tax dollars the state paid out to big companies through the Research Activities Credit last year.

But it is probably enough to leave tax payers feel well and truly plucked.

Nobody notices a few missing feathers.

Des Moines Register, Branstad will sign Iowa Speedway tax break in Newton ceremony Wednesday.  Because NASCAR has better lobbyists than you do.

Tax Justice Blog, State News Quick Hits: State Lawmakers Not Getting the Message

 

BitcoinAlan Cole, Bitcoin’s IRS Troubles (Tax Policy Blog:

The price of the virtual currency Bitcoin has fallen to about $461 from a closing price of $586 last Monday. This decline of about 21% came in the wake of an IRS ruling that net gains from Bitcoin transactions will be taxed as capital gains.

Nobody wants a Schedule D item for every purchase.

TaxProf, The IRS Scandal, Day 328.  April Fools edition, unfortunately.

News from the Profession: The Forgotten Spouses of Public Accounting (Going Concern).  I’m sure mine is around here somewhere.

 

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Tax Court decision cuts 3.8% Obamacare Net Investment Income Tax for many trusts.

Friday, March 28th, 2014 by Joe Kristan

20120511-2The Tax Court reduced 2013 income taxes for a lot of trusts yesterday.  The court ruled that trustees can “materially participate” in rental real estate activities, and by extension in other activities.  If a taxpayer “materially participates” in an activity, it is not subject to the Obamacare 3.8% “Net investment Income Tax” on that activity’s income.

This is a big deal for trusts because they are subject to this tax at a very low income level — starting at $11,950 in 2013.  The IRS has said that it considers it nearly impossible for trusts to materially participate.  Yesterday’s decision flatly rejects the IRS approach.

The IRS had stated its position in a ruling involving an “Electing Small Business Trust,” which is a type of trust that can hold interests in S corporations — and which tend to get hit hard by the NII tax.  The IRS said that a president of the corporation who was also a trustee of the ESBT was participating in the business not “as trustee,” but as a corporation employee — and therefore the trust didn’t materially participate.  The Tax Court disagreed with IRS thinking yesterday:

The IRS argues that because Paul V. Aragona and Frank S. Aragona had minority ownership interests in all of the entities through which the trust operated real-estate holding and real-estate development projects and because they had minority interests in some of the entities through which the trust operated its rental real-estate business, some of these two trustees’ efforts in managing the jointly held entities are attributable to their personal portions of the businesses, not the trust’s portion. Despite two of the trustees’ holding ownership interests, we are convinced that the trust materially participated in the trust’s real-estate operations. First, Frank S. and Paul V. Aragona’s combined ownership interest in each entity was not a majority interest — for no entity did their combined ownership interest exceed 50%. Second, Frank S. and Paul V. Aragona’s combined ownership interest in each entity was never greater than the trust’s ownership interest. Third, Frank S. and Paul V. Aragona’s interests as owners were generally compatible with the trust’s goals — they and the trust wanted the jointly held enterprises to succeed. Fourth, Frank S. and Paul V. Aragona were involved in managing the day-to-day operations of the trust’s various real-estate businesses.

That would seem to put to rest the IRS “as trustees” catch-22.

The Tax Court decision doesn’t make the NII go away for all trusts.  Trusts with only “investment” income, like interest and dividends, are not helped by this decision.  Also, the decision by its terms only covers situations in which the trustee is materially participating in the trust activity; “We need not and do not decide whether the activities of the trust’s non-trustee employees should be disregarded.”  In this respect the Tax Court doesn’t go as far as a Texas U.S. District Court did it the Mattie Carter Trust case, which counted participation of trust employees in determining whether the trust materially participated in an activity.

Still, even with limitations, the case is a big taxpayer win.  It will especially help ESBTs avoid tax on operating income from S corporations when a trustee is also a corporation employee.  Also, while the case doesn’t say that non-trustee employees can give trusts material participation, it doesn’t rule it out, either.  That means bold trusts with employees that manage trust operations may be able to avoid the 3.8% tax, should the Tax Court adopt the Mattie Carter Trust approach.  Future litigation will have to settle the issue.  The IRS is also likely to appeal this case.

An aside: The IRS asserted its usual outrageously-routine 20% “accuracy-related” penalty — and it lost on its underlying argument.  In a just tax system, the IRS would have to write a check to the taxpayer for the amount of the asserted penalties whenever this happens.   The IRS assertion of penalties is far too routine, and should be reserved for cases in which the taxpayer is actually taking a flaky position, or doesn’t bother to substantiate deductions.  When it asserts a penalty and the taxpayer actually wins on the merits, the IRS loses nothing under current law.  Tax Analysts hosted a seminar yesterday on a Taxpayer Bill of Rights.  Any bill worthy of the name would have a “sauce for the gander” rule that would make the IRS — and even IRS employees — as liable as taxpayers are for flaky positions.

Cite:  Frank Aragona Trust et al. v. Commissioner; 142 T.C. No. 9

Related: Self-rental, business sales benefit from new Net Investment Income Tax regulations.

Also: Paul Neiffer, Taxpayer Victory in Frank Aragona Trust Case, on the implications for farm interests held in trust.

A summary of “material participation” rules is below the fold.

(more…)

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Tax Roundup, 1/28/14: Another Iowa ESOP debacle. And: soft skills!

Tuesday, January 28th, 2014 by Joe Kristan


20120920-3
Iowa gets all of the good bad ESOP cases.  
Thanks largely to the energetic work of a single ESOP evangelist in the 1980s and 1990s, Iowa has been treasure trove of cases involving faulty employee stock ownership plans.  The pinnacle of these cases may have been the Martin v. Feilen case, finding violations sufficient for the Eighth Circuit to rule that a district court “abused its discretion” by not banning the Iowa ESOP evangelist from doing any further ERISA work.

Iowa’s bad ESOP history got another chapter yesterday in Tax Court.  The ESOP involved a Rockwell, Iowa S corporation, which had an ESOP owner.  The non-ESOP shares were owned by the corporation’s sole employee and his wife.

So many things can go wrong with this sort of arrangement, and they all did — starting with Sec. 409(p).  Judge Kroupa explains (some citations omitted, emphasis added):

  Responding to perceived abuses, Congress in 2001 enacted section 409(p), which generally limits the tax benefits available through an ESOP that owns stock of an S corporation unless the ESOP provides meaningful benefits to rank-and-file employees.

There are significant tax consequences when an ESOP violates the section 409(p) requirements. For one, an excise tax equal to 50% of the total prohibited allocation is imposed. Sec. 4979A. Furthermore, the ESOP will not satisfy the requirements of section 4975(e)(7) and will cease to qualify as an ESOP. 

Those are pretty severe penalties.  So how do you violate Sec. 409(p)? Roth and Company alum Nancy Dittmer explains:

Section 409(p) is satisfied if “disqualified persons” do not own 50% or more of the S corporation’s “stock.” This stock includes allocated and yet-to-be allocated ESOP shares, synthetic equity of the S corporation, and any shares held directly in the S corporation. The ESOP shares and any synthetic equity are considered to be “deemed-owned” shares for purposes of Section 409(p).

In general, a disqualified person is any ESOP participant who owns 10% or more of the ESOP’s stock. 

20140128-1As our Rockwell taxpayer was the only employee of the S corporation and, by attribution, the only owner of the ESOP, he owned 100% of the shares.  Those of you who are good at math will realize that 100% exceeds 50%, and 409(p)’s excise tax and plan disqualification applies.

So things looked dark for the Rockwell ESOP.  Yet there was a glimmer of hope — not only was the ESOP screwed up, so was the S corporation.  The corporation had 2 classes of stock, which normally disqualifies an S corporation election.  If the corporation isn’t an S corporation, it can’t violate 409(p)!  Alas, Judge Kroupa decided here that two (OK, more than two) wrongs didn’t make a right:

     Petitioner represented to respondent that it qualified as an S corporation for 2002 when it filed its election to be treated as such. Respondent relied on this representation for 2002 because petitioner reported on its 2002 Form 1120S that it owed no income tax because of its electing to be treated as a passthrough entity under subchapter S. The statute of limitations on assessment now bars respondent from adjusting petitioner’s income tax liability for 2002. See sec. 6501(a).

Petitioner was silent regarding its desire to be treated as something other than an S corporation for 2002. Petitioner cannot avoid the duty of consistency, however, by simply remaining silent. Allowing silence to trump the duty of consistency would only encourage gamesmanship and absurd results. Therefore, we will treat petitioner as an S corporation for 2002 under the duty of consistency. 

This bundle of bad facts resulted in $161,200 in taxes and another $76,000 or so in penalties.

The moral?  In spite of media reports, it can be dangerous to game the ESOP rules to avoid tax on S corporation income.  There are many hazards and much legal complication.  If you want to have an ESOP, be sure to bring in a specialist.

Cite: Ries Enterprises, Inc., T.C. Memo 2014-14.

 

Me: IRS gives mulligan to elect portability for $5 million estate exclusion

Paul Neiffer, Not Too Late to Make Portability Election!  I have more here.

Kay Bell, Decoding your W-2

TaxGrrrl, Do You Need To File A Tax Return In 2014?   

 

TaxProf, The IRS Scandal, Day 264

Kyle Pomerleau, The U.S. Has the Highest Corporate Income Tax Rate in the OECD (Tax Policy Blog):

OECD corporate rates

And as Iowa has the highest corporate rate in the U.S., at 12%, we’re number 1!  In a bad way.

 

Robert D. Flach is right on time with your Tuesday Buzz!

 

Career Corner: Soft Skills Are For Pansies (Going Concern)

 

 

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Tax Roundup, 1/9/2014: She stole from me! And gave it to my kids! And: $10 pizza and tax show!

Thursday, January 9th, 2014 by Joe Kristan

20120511-2It’s a rare thief that applies her ill-gotten gains to pay for college for the victim’s children.  But a Texan filed a tax return claiming just that, and it ended up in a Tax Court case decided yesterday.

The taxpayer divorced Wife #1 in March 2005, marrying Wife #2 in May 2005.  The second marriage went downhill quickly, with ending in an August 8 2006 divorce.

In the summer of 2006, the taxpayer asked Wife #1 to help him with some personal issues, including an alcohol problem and financial issues arising from the divorce.  Somewhere along the way, $120,000 was transferred to Uniform Transfers to Minors Act account for the children of the marriage to Wife #1 under signature authority granted by the taxpayer to Wife #1.  Judge Cohen explains:

Petitioner expressed to [Wife #1] that he intended that the money be used for expenses related to their children’s education. During this conversation, petitioner also discussed his upcoming divorce from [Wife #2]. Petitioner suggested to [Wife #1], and later represented to an Internal Revenue Service agent, that he wanted to preclude {Wife #2′s] access to the funds.

The funds ended up being spent on for their kids’ schooling, but eventually the taxpayer had other needs:

In September 2008, petitioner was having financial difficulties. He attempted to obtain funds from the accounts that [Wife #1] had set up. He advised [Wife #1} that the $120,000 transferred to her in 2006 should have been put in revocable trusts rather than in the childrens' educational accounts.
 On June 19, 2009, petitioner filed a civil lawsuit against [Wife #1] related to the $120,000 transferred to the UTMA and section 529 accounts for their children and other matters. [Wife #1] asserted counterclaims in the lawsuit. In early 2010, the parties to the lawsuit entered into a settlement agreement. In the settlement agreement, petitioner and [Wife #1] acknowledged that the education accounts were the property of their children. [Wife #1] agreed to provide to petitioner biannual financial information related to the UTMA accounts. Petitioner and [Wife #1] released all claims against each other in the settlement agreement.

The judge weighed the word of the two spouses, and came down on the side of the one who hadn’t been to rehab:

We understand that former spouses are not objective witnesses in many instances, but we must reach a decision based on which version is more probable and which party has the burden of proof. In this instance, considering primarily the passage of time between the transaction and petitioner’s expressions of disagreement with [Wife #1]‘s handling of the transaction and the absence of contemporaneous corroboration of petitioner’s intentions, we conclude that the burden of proof has not shifted and that petitioner has not proven that a theft occurred.

The Moral?  It isn’t considered standard financial procedure to give your ex-spouse signature authority over your finances.  If you do, you should probably document it very carefully.  If you don’t like the results, it might be hard to convince the IRS and a judge that you’ve been wronged.

Cite: West, T.C. Memo 2014-2.

 

Iowa Businesses!  The deadline for claiming the commercial property tax credit enacted last year is January 15!  Details at the Iowa Department of Revenue.

 

TaxGrrrl, Filing Your Taxes Early? IRS Will Not Process Returns Before Opening Day.  And don’t try to file until you have your W-2s and 1099s.

William Perez, Requesting Form W-9 from Independent Contractors

Robert D. Flach ponders A VOLUNTARY RTRP DESIGNATION!  I don’t care for the idea, for the reasons Jason Dinesen explains, but would be fine with preparers banding together to develop their own privately-administered standards.  I have no faith in the IRS doing so fairly or effectively.

Scott Hodge, The Number of Millionaire Tax Returns Fluctuates Every Year (Tax Policy Blog)

million-dollar filers

And the population of the million-dollar filers turns over a lot.

Cara Griffith, The Recurring Question of Corporate Disclosure (Tax Analysts Blog):

My general objection to requiring the disclosure of corporate tax return information is that it seems unnecessary. State tax authorities and economic development commissions are already receiving a substantial amount of information about corporate taxpayers. They have the ability to do any type of analysis they choose. Given that the information is already available to those who can properly analyze it, why is it necessary to make it public?

Why not instead develop a database of which tax incentives are available, who has received them, and the benefits they provide? 

Excellent idea.

Tax Justice Blog, Will Basic Constitutional Rights Be the Next Casualty of Kansas’ Supply-Side Experiment?  Hard to see where that happens in this post.

Kay Bell, LBJ’s war on poverty, aided by the Earned Income Tax Credit.  Too bad 20-25% of it gets stolen or misapplied.

EITC error chart

TaxProf, The IRS Scandal, Day 245

 

Des Moinesiacs, listen up!  From Kathryn Smith at IMA:

Please join us for the annual ICN broadcast sponsored by the North Central Regional Council of Institute of Management Accountants on January 9, 2014.  Our speaker will Joe Kristan.  Mr. Kristan will be presenting the 2013 Income Tax Update.  If you have not heard Joe before you are in for a treat.  Joe mixes a little humor with a rather dry subject.  We will start broadcasting at 6:00 p.m. and be joined by locations in Dubuque, Cedar Falls, Cedar Rapids, Grinnell and Davenport.  This is one meeting you won’t want to miss.  Join the Des Moines Chapter at 5:30 p.m. for pizza and pop.  Cost is $10.

It’s at Iowa Public Television, 6450 Corporate Drive, Johnston.  And rest assured, if you do this stuff for a living, it’s not a dry subject!

Career Corner: I’ll Take “Things That Are Worse Than Failing The CPA Exam” For $500, Alex (Going Concern)

 

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Tax Roundup, 12/12/13: Take the $20 million edition. And: Grassley says extenders will pass in 2014.

Thursday, December 12th, 2013 by Joe Kristan

 

20131212-1Next time, take the cash.  A corporation decided a tax deduction from walking away from securities it had paid $98.6 million for would be worth more than the $20 million in cash it had been offered for them.  The Tax Court yesterday told them that they made a big mistake.

Gold Kist, Inc. bought the securities issued by Southern States Cooperative, Inc. and Southern States Capital Trust in 1999.  The issuers offered to redeem the securities from Gold Kist in 2004 for $20 million.  (Gold Kist was later acquired by Pilgrims Pride Corp, which inherited Gold Kist’s tax history.)

Gold Kist believed that it would get an ordinary loss deduction if it simply abandoned the securities, vs. a capital loss on the sale.  Ordinary losses are fully deductible, while corporate capital losses are only deductible against capital gains, and they expire after five years.    A $98.6 million ordinary loss would be worth about $34.5 million in tax savings, which would be worth more than $20 million cash and a capital loss, which can only offset capital gains, and only those incurred in the nine-year period beginning in the third tax year before the loss.

Unfortunately, the Tax Court found a flaw in the plan: Sec. 1234A.  It reads:

§ 1234A – Gains or losses from certain terminations
Gain or loss attributable to the cancellation, lapse, expiration, or other termination of—

(1) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or

(2) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer,

shall be treated as gain or loss from the sale of a capital asset. The preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement).

The taxpayer said that Sec. 1234A didn’t apply, according to the court:

Petitioner’s primary position is that the phrase “right or obligation with respect to property” means a contractual and other derivative right or obligation with respect to property and not the inherent property rights and obligations arising from the ownership of the property. We disagree.

The taxpayer said the legislative history of the section supported their argument.  The Tax Court thought otherwise:

In our view Congress extended the application of section 1234A to terminations of all rights and obligations with respect to property that is a capital asset in the hands of the taxpayer or would be if acquired by the taxpayer, including not only derivative contract rights but also property rights arising from the ownership of the property. 

The taxpayer also said that if that’s what Congress meant, the IRS would have revised Rev. Rul. 93-80, which allows an ordinary loss on certain abandonments of partnership interests.  The Tax Court responded:

The ruling makes clear that, if a provision of the Code requires the transaction to be treated as a sale or exchange, such as when there is a deemed distribution attributable to the reduction in the partner’s share of partnership liabilities pursuant to section 752(b), the partner’s loss is capital. Rev. Rul. 93-80, supra, was issued four years before section 1234A was amended in 1997 to apply to all property that is (or would be if acquired) a capital asset in the hands of the taxpayer. As we previously stated, the Commissioner is not required to assert a particular position as soon as the statute authorizes such an interpretation, whether that position is taken in a regulation or in a revenue ruling. 

So it’s a capital loss only for the taxpayer.

Presumably the Gold Kist board didn’t decide to go for the ordinary loss on its own.  Somewhere along the way a tax advisor told them that this would work.  That person can’t be very happy today for advising the client to walk away from $20 million in cash.

Cite: Pilgrim’s Pride Corp, 141 TC No. 17.

 

Grassley-090507-18363- 0032Quad City Times reports Grassley predicts tax credits extensions, but not until 2014:

 There won’t be any extension before Christmas, Grassley predicted, but not because of political opposition to the credits. Based on past performance, he said, Congress will return after the New Year and approve four dozen or more tax credits.

“There are a lot of economic interests” represented in the tax credits, he said. Those interest groups collectively “put a lot of pressure on Congress to re-institute the credits.”

The delay, Grassley said, can be attributed to the ongoing discussion about “massive tax reform.”

Senator Grassley has more insight about what will happen than I do, but I can”t share his faith that the lobbyists will overcome Congressional dysfunction.  I had hoped any extenders would be included in the budget deal announced this week, and they weren’t.

Actually, I would prefer that the extenders not be extended at all rather than passed temporarily once again.   The whole process of passing temporary tax breaks is a brazen accounting lie.  Congressional budget rules score temporary provisions as if they will really expire, even when they have been extended every time they expire.  Once again, behavior that would lead to prison in the private sector is just another day in Congress.

 

Roberton Williams, Budget Deal Doesn’t Raise Taxes But Many Will Still Pay More:

The budget deal announced Tuesday wouldn’t raise taxes—members of Congress can vote for it without violating their no-tax pledges. But the plan will collect billions of dollars in new revenue by boosting fees and increasing workers’ contributions to the Federal Employee Retirement System (FERS). To people paying them, those higher fees and payments will feel a lot like tax hikes. 

 

David Brunori, States Should Just Say No to Boeing (Tax Analysts Blog):

Boeing is acting rationally — politicians are willing to give things away, and Boeing is willing to accept those things. But politicians should try saying no once in a while. Maybe we would respect them a little more.

Well, it would be hard to respect them less.

 

 

Source: The Tax Foundation

Source: The Tax Foundation

William McBride, Obama: Cut the Corporate Tax Rate to Help the Poor (Tax Policy Blog):

Indeed, cutting the corporate tax rate is probably the best way to increase hiring and grow wages. The President cited no studies to support this, because it is not really in dispute among economists. So why not cut the corporate rate, period, without any conditions or offsetting corporate tax increases elsewhere?

Corporate rate cuts would be a good thing, but don’t forget that most business income nowadays is reported on individual returns.

 

Joseph Thorndike, Congress Is Making a Bad Deal on the Budget, but One Republican Has a Better Idea (Tax Analysts Blog)

It’s amazing what passes for success in Washington these days. Budget negotiators on Capitol Hill have delivered a non-disaster, cobbling together a pathetic half-measure that pleases no one and accomplishes almost nothing.

True, it allows Democrats and Republicans to avoid abject failure, which is no small thing, given recent history. These days, just keeping the wheels from flying off qualifies as statesmanship.

Considering what happens when Congress “accomplishes” something (Obamacare, anyone?), let us praise them for doing as little as possible.

 

Robert D. Flach has wise counsel for clients:  PUT IT IN WRITING.

So if you have a tax question you want to ask your preparer, instead of picking up the phone submit the question in an email, with all the pertinent facts.  And if you receive a notice from the IRS or your state, mail it to your tax pro immediately.

Yes.

 

William Perez, Donating Appreciated Securities to Charity as a Year-End Tax Strategy

Paul Neiffer, Is it Time for an IC-DISC.  If you produce for export, an IC-DISC can turn some ordinary income into dividend income, taxed at a lower rate.

Tony Nitti, IRS The Latest To Send Manny Pacquiao To The Mat: Boxer Reportedly Owes $18 Million

Kyle Pomerleau, Senator Baucus’s Plan for Cost Recovery Heads in the Wrong Direction

TaxProf, The IRS Scandal, Day 217

Cara Griffith, Improving the Transparency of New York’s Tax Collection Process (Tax Analysts Blog)

Jack Townsend, Are Brady Violations Epidemic?  A federal appeals judge says prosecutors routinely withhold evidence that would help defendants.

 

News from the Profession: The PCAOB Is Grateful To The PCAOB For the PCAOB’s Work (Going Concern)

 

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Tax Roundup, 12/10/2013: Penalize everyone edition! And one for me, one from you.

Tuesday, December 10th, 2013 by Joe Kristan

 

20120511-2IRS: shoot first, let the Tax Court sort it out later.  One of the most annoying features of exams in recent years is the IRS habit of imposing penalties on almost every underpayment, regardless of the cause or the taxpayers’ history of good compliance.  It’s nice to see a case like one in the Tax Court yesterday that held the IRS went too far.

The taxpayer were a married couple with a 50-year unblemished compliance history.  The wife’s employer switched from issuing paper W-2s to downloadable versions for 2010.  She didn’t get the memo, if there was one, and left her wage income off the couple’s 1040.  The IRS computers noticed and issued a notice and penalty; the taxpayers double-checked with their preparer and immediately paid the extra taxes, but they balked at the 20% underpayment penalty.

The Tax Court pointed out (all emphasis mine):

     Petitioners regard their tax situation as fairly complex, as they receive income from multiple sources, including two subchapter S corporations that lease farmland out of State. Petitioners worry about their ability to prepare accurate tax returns; accordingly, for many years, including 2010, petitioners have hired a certified public accountant (C.P.A.) to assist them in the preparation of their returns.

Petitioners are aware of the importance of recordkeeping, and for many years they have maintained a system for keeping track of documents that will be needed to prepare their returns. Thus, when petitioners received in the mail a tax document such as a Form W-2, Wage and Tax Statement, Form 1098, Mortgage Interest Statement, Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., or Schedule K-1, Beneficiary’s Share of Income, Deductions, Credits, etc., they would briefly review it and then place it in a dedicated tax file, along with other tax-relevant documents that they collected throughout the year. In February or March petitioners would meet with their C.P.A. and furnish him with their tax file. Once the return had been prepared, petitioners would again meet with the C.P.A. to review the return.

So the taxpayers had a pretty good system in place to ensure compliance.  Yet the missing W-2 fell through the cracks — partly because their preparer thought the wife had retired.

     Petitioners’ failure to notice the absence of a Form W-2 for Mrs. Andersen was an oversight on their part. However, the oversight was at least partially understandable given both the number of petitioners’ tax documents and the fact that Mrs. Andersen never received from either her employer or her employer’s payroll agent a paper copy of a Form W-2, something that she had previously received throughout her career. Nor had Mrs. Andersen received notification from either of those parties that the payroll agent had discontinued issuing Forms W-2 in paper form in favor of making electronic copies available on the Internet.

Petitioners also failed to notice, when they reviewed their return with Mr. Trader, that Mrs. Andersen’s wages were not included on line 7. But when, as part of the review process, petitioners and Mr. Trader compared the 2010 return with the 2009 return, the parties noted the similarity of the amounts of income and the absence of any anomaly, thereby suggesting that no error had occurred. Indeed, the difference between the amounts of income reported on petitioners’ 2010 and 2009 returns was less than $1,000, or two-thirds of one percent of their 2009 income, a difference that would not ordinarily give rise to any suspicion that income had not been fully reported.

So the mistake was one a reasonable human would make.  But the IRS thinks no mistake is reasonable, apparently.  Fortunately the Tax Court held otherwise:

Clearly, petitioners made a mistake. But we think it was an honest mistake and not of a type that should justify the imposition of the accuracy-related penalty. In short, we think that petitioners’ diligent efforts to keep track of their tax information, hiring a C.P.A. to prepare their tax return, reviewing their return with the C.P.A. when it was completed, and prompt payment of the deficiency upon receipt of the notice of deficiency, together with the other facts and circumstances discussed above, represent a good-faith attempt to assess their proper tax liability. Accordingly, we hold that petitioners have carried their burden with respect to the reasonable cause and good faith exception under section 6664(c)(1) and that petitioners are therefore not liable for the accuracy-related penalty under section 6662(a).

So: good records, full cooperation with a reliable preparer, and prompt payment of any underpaid taxes on discovery of the underpayment were key.  It’s ridiculous that it took a trip to Tax Court to get what seems like the only appropriate and fair result.  The IRS should stop being so trigger-happy with penalties.  Maybe a sauce for the gander rule, where the IRS and IRS personnel are as liable for penalties on incorrect assessments as taxpayers are for those on underpayments, would get them to see reason.

Cite: Andersen, T.C. Summ. Op. 2013-100

 

Kyle Pomerleau, CBO Report Confirms that the Federal Government Redistributes a Substantial Amount of Income  (Tax Policy Blog, my emphasis):

They also break down taxes paid and spending received by income quintile. When looked at this way, the redistribution becomes very clear. According to their analysis, those in the lowest quintile received $22,000 in spending minus taxes. In contrast, taxes exceeded spending by $56,000 in the highest quintile.

Source: Congressional Budget Office

Source: Congressional Budget Office

 

When private think tanks like the Tax Foundation issue this sort of report, people favoring higher taxes on “the rich” dismiss it.  CBO numbers are harder to credibly attack as partisan.

But we can always find a dark side.   CBO Finds Growing U.S. Income Inequality (Roberton Williams, TaxVox)

 

William Perez, Selling Losing Investments as Part of a Year-End Tax Strategy.

Tony Nitti, IRS Addresses Deductibility Of Organizational And Startup Costs Upon Partnership Technical Termination.  By saying no.

TaxGrrrl, Tax Scammers Continue To Dial Up Trouble For America’s Seniors.  This is a big problem.  Unless they have contacted you by mail first, the tax folks aren’t going to phone you.  Just hang up.

Paul Neiffer, How $12,000 Becomes $6,000 or less.  By putting it in farmland, if crop prices stay where they are.

 

Stephen Olsen,  IRS says Hom Gonna Getcha on FBAR too.  “The Swiss government and banks are folding like a bunch of cheap patio chairs.”

Phil Hodgen, Voluntary Disclosure and Frozen Swiss Bank Accounts

Brian Mahany,  How To Respond When Your Foreign Bank Asks About Your IRS Compliance

Jeremy Scott, Will FATCA Ever Go Into Effect? (Tax Analysts Blog) “FATCA should be put into effect as soon as possible, and the administration should stop bending separation of powers rules by using delays to functionally repeal unpleasant parts of statutes.”

Nah, just repeal the whole mess.

 

 

20120510-1

Winter Carnival!  Tax Carnival #123: It’s Beginning to Look a Lot Like Tax Time (Kay Bell)

TaxProf, The IRS Scandal, Day 215

Um, no, was there one?  Remember the Tax Reform Act of 1995? (Clint Stretch, Tax Analysts Blog“What is certain is that the 1995 hope of creating a tax system that genuinely favors savings and investment is dead.”

It’s always a good Tuesday for a Robert D. Flach Buzz!

 

We hardly knew ye.  Farewell to Feel-Good Tax Reform (Martin Sullivan, Tax Analysts Blog)

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