INFINITE PARTNERSHIPS – CPA TAX ATTORNEY

Jul 07

IRS Business Purpose Doctrine SLAT/DAPT Family LLC Audit

By Chris Moss CPA Tax Attorney in Business Purpose Doctrine, DAPT, Domestic Asset Protection Trust, Estate Planning, Family Limited Liability Company, Family LLC Member Discounts, Family Member LLC, Gift Tax, IRS Audit, SLAT, Spousal Lifetime Access Trust

Welcome to Taxview with Chris Moss CPA Tax Attorney

If you have been following TaxView with Chris Moss CPA Tax Attorney regarding Irrevocable Spousal Lifetime Access Trusts and Domestic Asset Protection Trusts (SLATs and DAPTs) we have recommended best practice in 2019 is to have your Irrevocable SLAT/DAPT own your Family or Holding LLC partnership with your spouse, children and grandchildren as beneficiaries, and to transfer as much of your assets to your family Holding LLC as you can prior to the 2020 elections. However, there are IRS traps waiting to be sprung, as the Government waits, patiently I might add, until you die, disallowing your 2019 gift tax returns and bringing back all those assets ($22.8M married in 2019) back into your estate to be taxed at whatever rate Congress has enacted at the time of your death. The trap? The Business Purpose Doctrine of Court made case law and the IRS Code Section 2036(a): Your estate plan must have a legitimate non-tax business purpose. Seems simple, but perhaps not so simple. How to avoid this trap? Stay with us here on TaxView, with Chris Moss CPA Tax attorney to find out how to easily maneuver past this trap so your SLAT/DAPT and family Holding LLC will be created on a solid structural foundation to withstand the IRS storms ahead when your estate gets audited years after your passing.

We are going to start with what seems to be a very simple concept the “Business Purpose Doctrine”. Courts have held that any structure set up to primarily avoid paying tax will not withstand an IRS audit unless the structure has a legitimate “Business Purpose”. “The objective evidence must indicate that the non-tax reason was a significant factor that motivated the Estate Plan Family Holding LLC creation. A significant purpose must be an actual motivation, not a theoretical justification. Estate of Bongard v Commissioner, 124 T.C. 95, 118 (2005). However, as simple as it seems the Business Purpose Doctrine has been the downfall of many estate plans. This is especially true for the Family Holding LLC set by Edward Beyer as his estate discovered after his death in US Tax Court Case Beyer v IRS T.C. Memo 2016-183. The facts are very complex, but in essence Trusts were set up and eventually owned Holding Company EGBLP. The IRS auditors claimed that the value of the assets Beyer transferred to EGBLP through the Trusts should be includible in the value of his gross estate under Section 2036(a).

Judge Chiechi of the US Tax Court asks on page 114 of this long Opinion “Was there a transfer of property by Beyer, for full consideration, and if not did Beyer retain possession or enjoyment of the right to income within the meaning of Section 2036(a)(1) or did he retain the power of appointment, the right to designate the person would would enjoy the property transferred. The Court finds that a transfer was made but in order to avoid Section 2036(a) that had to be a bona fide sale. In connection with a family Holding company the Court points out that “where the record establishes the existence of a “legitimate” and significant non tax reason for creating the Family LLC and the transferors received partnership interests proportionate to the value of the property transferred then the “bona fine sale” exception under 2036(a) is satisfied. Citing Estate of Bongard V IRS 124 T.C. 95 at page 118 (2005).

Unfortunately for Beyer his only non-tax reasons for setting up the EGBLP was to keep some stock holdings in a block, to give his brother experience in managing Beyer’s assets, and to ensure continuity of management of his assets. The Court found that none of these were legitimate non-tax reasons based on the facts that Beyer presented. The Court eventually found for the IRS claiming that there was no legitimate business purpose in Beyer created his Family Holding LLC and that therefore Section 2036(a) would claw back the transfers back into the Beyer’s estate. IRS wins Beyer loses.

Lea Hillgren’s estate found out they made the same mistake as Beyer when Hillgren in early 1997 shortly before her death, but after various suicide attempts, her CPA Tax Attorney set up in California her family Holding company, LKHP. But after her final successful suicide death in June of 1997 the IRS audited and clawed back the transfers back into the Hillgren estate claiming LKHP had no legitimate business purpose. Hillgren’s estate appealed to the US Tax Court. The facts in Estate of Hillgren vs IRS T.C. Memo 2004-46. are rather complex. Lea Hillgren set up LKHP her family LLC as a California limited partnership to own various income-producing properties. She did not marry and had no children but had an on again off again relationship with O’Brien. Unfortunately, Hillgren at age of 41 committed suicide and was survived by her parents and brother.

Hillgren’s estate contends that the creation of LKHP was indeed motivated by legitimate business interests. The first business purpose the estate put forth for LKHP was a “premarital asset protection” device, but IRS points out that Hillgren permanently broke up with O’Brien before her initial unsuccessful suicide attempt. The Court notes that it is unclear from the record whether Obrien and Hillgren were intending to get married. The IRS argues further that under California law as a community property state Hillgren still had the right to transfer her interest to a spouse and had the power to approve that transfer in spite of the LKHP operating agreement prohibition over such transfer. Judge Cohen concludes “There is nothing in the language of the LKHP agreement stating the reasoning behind the formation of the partnership….The estate’s claim that the partnership served to protect decedents assets from an impending marriage to O’Brien is unsupported by the record, therefore, the Court concludes that “the value of the properties that were transferred to Family Holding Company LKHP are includable in Hillgren’s estate under Section 2036(a). IRS Wins, Hillgren loses.
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Finally, once again a lack of business purpose proved fatal for Theodore R Thompson when IRS clawed back all his assets from his Family Holding LLC. After losing in US Tax Court Estate of Thompson, Betsy Turner Executrix vs IRS T C Memo 2002-246 the estate appealed to the 3^rd Circuit in Turner v IRS over at the 3^rd Circuit 382 F.3d 367 (3d Cir. 2004) claiming that the Family Holding company, Thompson Corporation had a legitimate business purpose. Chief Judge Scirica of the 3^rd Circuit points out that even if the Thompson’s transfer had a retained lifetime interest it could still avoid the claw back of Section 2036 (a) if the transfer was a “bona fide sale for adequate and full consideration, citing IRS Code 2036(a). Scirica noted that the Tax Court concluded there were no legitimate business concerns citing the US Tax Court case Estate of Thompson, Betsy Turner Executrix vs IRS TC Memo 2002-246. Further citing Strangi v IRS 85 TCM at 1331 (2003) where the Strangi family LLC engaged in no business operations or commercial transactions until Strangi’s death. The Court concluded that the Family LLC fails to qualify as the sort of functioning business enterprise that could potentially inject intangibles that would lift the situation beyond mere recycling. Strangi 85 TCM at 1344. Judge Scirica argues that “for essential the same reasons, we conclude there was no transfer for consideration within the meaning of Section 2036(a). The record demonstrates that the Family LLC was not a valid functioning business enterprise and did not rise to the level of legitimate business operations.

As the 3^rd Circuit concludes by citing the US Supreme Court a “good faith” transfer to a family limited partnership must provide the transferor some potential for benefit other than the potential estate tax advantages that might result from holding assets in the partnership form. Even when all the “i’s are dotted and t’s are crossed,” a transaction motivated solely by tax planning and with “no business or corporate purpose . . . is nothing more than a contrivance.” Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 79 L.Ed. 596 (1935). As discussed in the context of “adequate and full consideration,” objective indicia that the partnership operates a legitimate business may provide a sufficient factual basis for finding a good faith transfer. But if there is no discernable purpose or benefit for the transfer other than estate tax savings, the sale is not “bona fide” within the meaning of § 2036.

Chief Judge Scirica concludes for the 3^rd Circuit that after a thorough review of the record, we agree with the Tax Court that decedent’s inter vivos transfers do not qualify for the § 2036(a) exception because Turner’s Family LLC did conduct any legitimate business operations, nor provided decedent with any potential non-tax benefit from the transfers. IRS Wins Thompson Estate Loses.

Now that we all understand the Business Purpose Doctrine Trap, how does the Business Purpose Doctrine apply to you and how you can avoid it? While the Business Purpose Doctrine Trap seems easy enough to navigate around, quite a few estate plans put forth by very highly paid Attorneys and CPAs have been tripped up by this trap. Don’t let this happen to you. Make sure your CPA Tax Attorney creates your SLAT/DAPT estate plan with a Family Holding LLC that has numerous legitimate non-tax business purposes specifically as they relate to your spouse, children and grandchildren, and make sure you get a written guarantee from your tax professionals, hopefully at no extra charge, that they will defend any IRS Section 2036 (a) Business Purpose Doctrine audit years after the gift tax returns are filed, after your SLATs and DAPTs have been created after your Family Holding LLC has been set up, after all the partnerships and personal tax returns have been filed, and perhaps most likely a few short years after you have passed. Bullet proof your SLAT and DAPT from the IRS Business Purpose Doctrine SLAT/DAPT Family LLC Audit. Your spouse, children and grandchildren will be most thankful that you did. Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView with Chris Moss CPA Tax Attorney.

BUSINESS PURPOSE DOCTRINE, DAPT, Domestic Asset Protection Trust, IRS Audit, SLAT, Spousal Lifetime Access Trust

Jun 29

IRS Loan-Out Estate Plan Audit

By Chris Moss CPA Tax Attorney in DAPT, Domestic Asset Protection Trust, Estate Planning, Estate Planning by Gifting, Loan-Out LLC, SLAT, Spousal Lifetime Access Trust, Tax Planning

Welcome to TaxView with Chris Moss CPA Attorney

For those of you married couples who earn substantial income in the entertainment industry, the 2019 best estate plan in my view is to have your Loan-Out LLC owned by a Family LLC or what I refer to as a Holding LLC. Why? If your retired parents, the “grandparents” of your children, have already gifted to you up to the their lifetime exemption—which in 2019 is a record $22.8M married and $11.4M single, the Loan Out estate plan might allow them to “invest” rather than “gift” additional assets to Holding LLC as part of a comprehensive estate plan. Such an investment would transfer assets prior to the 2020 elections, thus avoiding the possible decrease in 2021 of their lifetime exemptions. Ask your CPA Tax attorney to create SLAT/DAPT his and her trusts in one of 17 DAPT friendly states to own the Holding LLC to keep the structure safe and protected when the IRS audits your parents estate years later claiming that the additional investments your parents made were in fact disguised gifts or worse never left their estate at all. How? Stay tuned in to TaxView with Chris Moss CPA Attorney and find out how to bullet proof your entertainment industry Loan-Out estate plan from IRS attack.

As part of a comprehensive estate plan, your CPA tax attorney should create two Lifetime Access Trusts, one for you and one for your spouse integrated within a Domestic Asset Protection Trust state. There are now 17 DAPT states by law: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. Both spouses would be trustee for each other, and a third Independent Trustee would be appointed with your children as the beneficiaries. The SLATs would then acquire Holding LLC. Holding LLC would own Loan Out LLC and also own any Rental LLCs operating either commercial or residential real estate. Holding LLC also can convert your primary residence, but not your parents, into a residential rental property where you would end up tenants with Holding LLC as Landlord. You then have your parents without filing gift tax returns make a legal arms length “investment” in Holding LLC as Purdue did in Estate of Barbara Purdue v IRS 2015.

Grandparents, Mr. and Mrs. Purdue, and their tax attorney created the Purdue Holding company PFLLC for various non-tax reasons including asset protection , which acquired all their assets. Various Purdue trusts were created funded with children and grandchildren beneficiaries. Over the years the trusts acquired more and more ownership of PFLLC. After the death of Mr. and Mrs. Purdue, the IRS audited the Estate Tax return and issued a notice of deficiency for estate and gift tax. The Purdue estate appealed to US Tax Court in Estate of Barbara Purdue vs IRS 2015.

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Judge Goeke argues that this estate plan was more than “circuitous recycling of value” citing Estate of Harper vs IRS 2002. “With regard to recycling of value, we have stated that when a decedent employs his capital to achieve a legitimate non-tax purpose, the Court cannot conclude that the taxpayer merely recycled his shareholdings” citing Estate of Schutt vs IRS 2005. The Court concludes that having found a legitimate nontax purpose for PFLLC we find the transfer as not merely an attempt to change the form in which Purdue held their assets and that full and adequate consideration is satisfied, citing Estate of Stone vs IRS 2012. Purdue wins, IRS loses.

How does this apply to you? Create the SLAT/DAPT to own the Holding LLC in 2019 or 2020. By all means allow your parents to invest in Holding LLC without them retaining any power of appointment type powers for their ownership interest. Do not make the mistake of setting up a Holding LLC and giving a power of appointment to your parents, as did Strangi in Strangi v IRS US Tax Court 2003. Appealed to the 5^th Circuit Affirmed 2005. In that US Tax Court case Judge Cohen at the US Tax Court grappled with whether the value of the property transferred by Albert Strangi to the Holding LLC and related LLCs and Corporations was includable in his gross estate pursuant to IRS Code Section 2036(a). The Court concludes that the arrangement placed Strangi in a position to act, alone or in conjunction with others, through his attorney in fact, to cause distributions of property previously transferred to the entities or of income therefrom. Decedent’s powers, absent sufficient limitation, therefore, fell within the purview of IRS section 2036(a). What kind of limitations would be sufficient? The Court cites Supreme Court case US v Byrum. The US Supreme Court argues that the existence of an independent trustee with the sole authority ultimately to pay or withhold income from the trust would be a sufficient limitation. Judge Cohen points out that Strangi owned 47 percent of his family LLC and was the largest shareholder. All decisions ultimately where made by Strangi’s attorney in fact. Strangi of course didn’t have a SLAT/DAPT own the family LLC with an independent trustee, and therefore, IRS wins Strangi Loses.

What does all this mean for the high end Entertainment Loan-Out Industry, asset protection and estate planning? First you can not have a multiple Loan-Outs earning substantial income and expect- if audited by the Government- to win an IRS audit without a comprehensive estate plan set up for non-tax reasons like asset protection and family unity. This requires in my view Holding LLC to own your Loan Out LLC. Second, create a SLAT/DAPT in one of the 17 asset protected states, with an independent trustee to acquire Holding LLC, its 100% owned Loan Out LLC and Rental LLC. Invite your parents to invest in Holding LLC avoiding the IRS Code Section 2036(a) traps discussed in Strangi and Purdue. Make sure the SLAT is created in one of 17 DAPT friendly states. You, but not your parents, can become tenants in your primary home if acquired by Holdings LLC. If you work with a good CPA Tax Attorney who will file all your tax returns including the Holding LLC partnership and your personal returns— and—who will be around to defend against any IRS audit when your parents pass, you can rest assured that your estate assets will be safe and well protected for many generations to come.

Thank you for joining us on TaxView, with Chris Moss CPA Tax Attorney.

DAPT, Domestic Asset Protection Trust, Loan-Out, SLAT, Spousal Lifetime Access Trust

Jun 24

IRS SPOUSAL LIFETIME ACCESS TRUST AUDIT

By Chris Moss CPA Tax Attorney in DAPT, Domestic Asset Protection Trust, SLAT, Spousal Lifetime Access Trust

Welcome to TaxView with Chris Moss CPA Tax Attorney.

Parents and Grandparents who are thinking about the next few generations for estate planning may want to consider a Spousal Lifetime Access Trust or SLAT for 2019. Create the SLAT in a state that allows for Domestic Asset Protected Trusts (DAPT) and you have the perfect trust for estate planning. The married gift tax exemption for 2019 is $22.8 Million, the largest in history. Depending on the outcome of the 2020 Presidential and Congressional election, best practice in estate planning for 2019 is to gift now rather than later to the next generation. The SLAT/DAPT combination in my view is the best way to go to keep your assets protected and safe for generations to come, allow for dramatic reduction of estate taxes, and as secondary benefit, annual income tax deductions as well. But beware—as gift tax returns are filed with the IRS, the Government waits, patiently I might add, for your passing to audit your estate, claiming that the SLAT assets never really left your estate and those assets now are taxable upon your death. So if you want to know the best way to set up a bullet proof SLAT so you can win any IRS estate audit after your passing, please stay with us here on TaxView with Chris Moss CPA Tax Attorney.

In order to best understand the concept of the SLAT I suggest you all read my 2015 article on Spousal Lifetime Access Trusts and Domestic Asset Protection Trusts (SLATs and DAPTs). I always couple my SLATs with DAPT’s in asset protection states. There are now 17 DAPT states by law: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming.

So, what is a SLAT? First and most important SLATs are for married couples only. Husband Trust 1 gifts to his children all his assets and appoints his wife as Trustee. Wife Trust 2 gifts to her children all her assets and appoints her husband as Trustee. If this trust was created in a friendly asset protection state like Virginia, an independent Virginia Trustee would be appointed for both trusts. The reason why a SLAT is considered the perfect married couple trust is that you are not only able to remove all your assets from your estate with no estate tax upon your death, but you are also while alive able to care for you spouse and still live very comfortably even though you have given all your assets to your children and grandchildren. This is possible only with the “ascertainable standard” defined as your spouse’s health, education, maintenance or support. The Independent Trustee as well as the Spouse Trustee must have “absolute discretion” on whether or not to make these payments because herein lies the first IRS trap as the “ascertainable standard” trap.

Under IRS Reg 26 CFR 20.2041-1 (c)(2) a power of the trustee to make distributions for the health, education, or support”, an “ascertainable standard” is not a power of appointment so even a spouse trustee can have this power. However, if the Trust requires such distributions and does not give the Trustee absolute discretion to make such distributions, there is a good chance the Trust will not be asset protected against creditors as was the case in Ducket v Enomoto decided in 2016 in the US District Court of Arizona. In that case the IRS tried to impose a tax lien on the trust. Under Arizona law, the state where the trust was created, a beneficiary may sue a trustee for money owed. Under the terms of the trust the Trustee was required to support the beneficiary as follows: The trustee shall pay to Enomoto so much or all of the net income and principal of the trust as in the sole discretion of the Trustee may be required for support in the beneficiary’s accustomed manner of living, for medical, dental, hospital, and nursing expense or for reasonable expense of education including study at college and graduate levels. The Court concludes that because the “Trustee shall pay” was used and not “may pay” the beneficiary had sufficient rights over the Trustee to allow the IRS lien to pierce the trust. IRS wins, Enomoto loses.
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Also watch out here for the Reciprocal Trust Doctrine IRS trap. The Reciprocal Trust Doctrine is an old doctrine fully developed in United States v Estate of Grace, 395 U.S. 316 (1969). In that case the decedent Joseph Grace executed a trust instrument providing for payment of income to his wife Janet for her life. Shortly thereafter, Mrs. Grace executed a virtually identical trust instrument naming her husband as a life beneficiary. After Mr. and Mrs. Grace had both died, the IRS audited and determined that the trusts were reciprocal and included the amount of Mrs. Grace’s trust back into the estate of Mr. Grace. The case was eventually argued before the US Supreme Court in 1969 on Certiorari from the United States Court of Claims.

Justice Marshall writing for the majority opinion says “we hold that application of the reciprocal trust doctrine requires only that the trustee be interrelated, and that the arrangement, to the extent of mutual value, leaves the settlors in approximately the same economic position as they would have been in had they created trusts naming themselves as life beneficiaries”. As a result, the Court required that the trust be included in taxpayer’s estate. IRS wins, Grace Loses.

Once you navigate past the ascertainable standard and reciprocal trust traps, make sure you create your SLAT as a fully asset protected trust, a Domestic Asset Protected Trust (DAPT) within the 17 asset protected states as Sessions should have done in Rush Univ Med Center v. Sessions, N.E. 2d , 2012 IL 112906, 2012 WL 4127261 (Ill, Sept. 20, 2012) (Rush U). The facts in Rush are rather simple. Sessions established a DAPT which irrevocably pledged $1.5M to Rush. Rush commenced construction in reliance on the pledge. Sessions however was diagnosed with cancer that he blamed on Rush for failure to diagnose. He wrote Rush out of his Will before he died in effect voiding the $1.5M gift. Rush sued the Sessions estate in Rush v Sessions claiming the estate was liable for the $1.5. Lower Courts grappled with conflicts between the Common law in Equity and the Illinois Fraudulent Transfer Act with the Appeals Court eventually ruling for Sessions. However, the Illinois Supreme Court reversed noting that Sessions created a DAPT for his own benefit and used the “spendthrift clause” to protect the assets from Rush, a legal creditor. Justice Thomas further opined that regardless of state statute supporting Sessions, justice and fairness require that Illinois common law in equity void the “spendthrift clause” of Sessions DAPT and allow Rush to pierce the DAPT and collect their debt. Rush wins, Estate of Sessions loses.

After you set up your SLATs then you need to restructure your assets by creating a family LLC Holding Company to acquire your other LLCs including your business, rental properties and other real estate as well as your primary residences. Please ask your CPA Tax Attorney to assist you in setting up this structure. Stay tuned for the next TaxView with Chris Moss CPA Tax Attorney to hear more on the benefit of having your SLAT own the LLC Holding company and not the assets directly creating the sturdy foundation you need to bulletproof your structure from IRS audit and keeping your assets protected and safe for generations to come. Thank you for joining us on TaxView from Chris Moss CPA Tax Attorney

DAPT, Domestic Asset Protection Trust, SLAT, Spousal Lifetime Access Trust

May 27

IRS INTENTIONALLY DEFECTIVE IRREVOCABLE GRANTOR TRUST S CORPORATION AUDIT

By Chris Moss CPA Tax Attorney in INTENTIONALLY DEFECTIVE GRANTOR TRUST, S CORPORATION, Tax Planning

Chris Moss CPA Tax Attorney

Welcome to TaxView with Chris Moss CPA Tax Attorney

If you are still an S Corporation and for whatever reason have not converted to an Limited Liability Company, and are getting ready to hand your business over to the next generation still operating as an S Corporation, why not consider transferring S Corporation ownership of your various family members to an Intentionally Defective Irrevocable Grantor Trust. Having an Intentionally Defective Irrevocable Grantor Trust own S Corporation shares will not only allow an easy direct succession to your heirs but will also protect your children and grandchildren from unexpected divorce, bankruptcy and creditor law suits and at the same time allow for the Trust to pay the taxes each year on behalf of the beneficiaries without incurring Gift tax. Too good to be true? While this strategy is indeed tried and true, the danger remains as the IRS waits until you die, very patiently I might add, to audit not only your estate, but to try as hard as they can to disallow your S Corporation election based on an expected Government claim that the required grantor trust status to hold the S Corporation stock was not adequately achieved. As a result if you lose in US Tax Court you could owe huge back taxes and may have to sell the business to pay the tax. So if you are interested in handing down your family business to the next generation in a safe protected structure that will last for generations while at the same time saving annual gift and income tax each year, stay with us here on TaxView with Chris Moss CPA Tax Attorney to learn how best to protect your family business S Corporation from the IRS S Corporation Intentionally Defective Grantor Trust Audit.

IRS Code Section 671-679 says if you transfer assets to a trust you control, by definition, a revocable trust, you are in fact the Grantor, and income and expense of the trust are taxed to you personally. But unfortunately if you were to fund your revocable grantor trust with S Corporation shares and related corporate dividend distributions from a family business, your ownership of these S Corporation shares would still remain inside and part of your estate. Thus upon your passing your S Corporation would be taxed in 2017 on any value over your $5.49M ($10.98 Married) lifetime exclusion.

Alternatively, if you give away your S Corporation shares through an irrevocable trust, you successfully have transferred your assets out of your estate for estate tax purposes, but unfortunately Section 1361 says you lose the S Corporation election because you don’t own the stock anymore. While you can gift your S Shares through a qualified subchapter S trust (QSST) or elect a small business trust (ESBT) each of those trusts are subject to a complex set of IRS rules and regulations that require in my view too much attention to make them worthwhile for most small business S Corporation taxpayers.

But no worry because there is a simple way to both transfer your s corporation shares out of your estate, and at the same time keep the S Election through an intentionally defective irrevocable grantor trust, allowing the triple benefit of the irrevocable trust “effective” for keeping the assets out of your estate but “defective” for income tax purposes thereby defaulting back to a revocable trust allowing for the S Election to be protected and finally being able to pay the taxes each year on the S Corporation profits attributable to the beneficiaries without incurring gift tax.

How is this possible? It starts with IRS Section 2036, which requires any gifts be brought back to you estate after your death to the extent which you retained a right of possession or enjoyment of, or the right to the income from the property gifted or the right to determine who that person should be to enjoy the property you gifted and the related income thereon.

There is, however, a few IRS sanctioned powers that the IRS says gives you the settlor or grantor irrevocable out of your estate upon death protection, yet at the same time allows S Corporation stock to be owned in the IRS approved Grantor Trust, and the same time the power to of the Grantor to pay taxes each year on the income generated by assets owned by the beneficiaries. A simple power for the Grantor to be able to substitute assets has been approved by the IRS under Revenue Ruling 2008-22.

The facts in Ruling 2008-22 are simple. Taxpayer funded an irrevocable trust for benefit of children. The Trustee has the power to acquire any property held by the trust and substitute other property of equivalent value. Citing Estate of Jordahl v Commissioner 65 T.C. 92 (1975) the IRS holds that substitution power was not a power to alter, amend or revoke the trust within the meaning of Section 2038 (a)(1) and 26 CRF 20.2038-1.

The facts in Jordahl were as follows: Jordahl, the decedent donor, created a trust for his wife with a provision that allowed for the substituting of insurance policies and securities or other property. The IRS said that this power of substitution required all the assets held by the trust to be taxed as part of the taxpayer’s estate under Section 2038 (a)(2). Judge Tietjens of the US Tax Court disagreed saying “we think although the decedent, under his broad discretionary powers with respect to investments, might invest in properties producing either a high or low return, such powers would have to be exercised in good faith in accordance with his fiduciary responsibility and could not be used for the purpose of attempting to favor any beneficiary to the detriment of other beneficiaries. . In other words, a power to replace trust assets with assets of equivalent value simply requires the Trustee to make sure that such a replacement of assets is in the best interest of all the beneficiaries.

Coupling the power to substitute property with a power to pay taxes almost appears “too good to be true” but is in fact true because IRS Revenue Ruling 2004-64 (July 6, 2004) allows the Grantor to pay income tax each year without having to report gift taxes to the beneficiaries on the tax paid. The facts in the case are simple: Taxpayer created an irrevocable trust for benefit of the children and retains no beneficial interest or power over the Trust income or principal that would cause the assets to be included in the Taxpayer’s estate. The Trust further allowed but did not require the independent trustee to reimburse the beneficiaries for any income tax liability they incurred on trust income attributable to the beneficiaries’. The Question presented to the IRS was whether a trustee discretionary decision to pay the taxes constituted a taxable gift to the beneficiaries.

The IRS concludes that the Taxpayer’s discretionary payment of taxes on the Trust income attributable to the beneficiaries is not a gift because the taxpayer not the Trust is liable for the taxes citing a 1944 case Commissioner v Estate of Douglas 143 F.2d 961 (3rd Cir 1944). As the Douglas case makes clear the trustee must he independent and have discretionary not mandatory power to pay the taxes. Taxpayer wins, IRS loses.

What does all this mean for Estate Planning with S Corporation stock? By all means after consulting with your tax attorney transfer the S Corporation shares to an Intentionally Defective Grantor Trust for all owners with key discretionary substitution provisions to allow for Grantor Status and discretionary power to pay annual income taxes. You will be not only creating a solid Estate Plan, but saving annual gift tax on the taxes the Trust pays while saving annual income tax to the beneficiaries. Rest assured with good advice from your tax attorney your tax strategy will win big when the IRS intentionally defective Grantor Trust audit comes knocking on your door years after you have long passed. Thank you for joining Chris Moss CPA Tax Attorney on TaxView.

See you next time on TaxView

Kindest regards
Chris Moss CPA Tax Attorney

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INTENTIONALLY DEFECTIVE GRANTOR TRUST, S CORPORATION

Jan 01

IRS Criminal Tax Audit

By Chris Moss CPA Tax Attorney in IRS Criminal Tax audit

Welcome to TaxView with Chris Moss CPA Tax Attorney

If your income tax returns have ever been audited by the IRS you might remember discussing with your husband whether you should represent yourself in the audit or retain the person who prepared your tax return to represent you? Or if your tax structure was a bit more complex you may have considered hiring a tax attorney. Whoever you chose to represent you becomes important due to the remote possibility that an IRS agent during a routine examination of your tax return might refer your case or at least consider referring your case to the IRS Criminal Investigation Division (CID) all because of something you said to the agent. Furthermore, did you know your constitutional 5th amendment right to remain silent also applies to an IRS audit? Indeed, unbeknownst to most Americans without the benefit of Miranda type warnings, these clashing interests between your right to remain silent and the Government’s right to collect taxes, emerge at the precise moment that the IRS examining agent begins your audit. While only a few thousand taxpayers actually are indicted and convicted of tax evasion each year, just the threat of a criminal investigation may be enough to turn your life inside out. So if you are interested in learning the best way in 2017 to fully cooperate with the Government’s legitimate interest to collect taxes, but also at the same time fully protect you and your family from harm, stay with us on Taxview with Chris Moss CPA Tax Attorney to learn how to defend yourself from an IRS Criminal Tax Audit that may find its way to your front door.

So how could something you say in 2017 during a routine IRS audit examination trigger the involvement by the CID? First some background on the CID: The IRS Criminal Investigation Division (CID) is comprised of approximately 3,500 employees worldwide, approximately 2,500 of whom are special agents whose investigative jurisdiction includes, but is not limited to, tax, money laundering and Bank Secrecy Act laws. The IRS site goes on to say that IRS special agents must follow strict procedures to initiate an investigation and recommend prosecution to the Department of Justice. These procedures include approval by several IRS officials to ensure investigations are based on factual evidence that tax fraud or another financial crime has occurred. CID publishes an annual business plan and is the only Federal agency that can investigate potential criminal violations of the Internal Revenue Code.

In order to better understand the significance of the words we say to the IRS examination agent, let’s review the Greve case decided in 2007, US v Greve US Court of Appeals for the 7th Circuit. James Greve head of his family business was audited by IRS examination division in 1997 by agent Luke. As the audit progressed Greve seemed disorganized and overwhelmed. By 2001 examination agent Luke and other revenue agents were considering a referral to CID. As a result, Greve was indicted by a Grand Jury in 2005. Greve was subsequently convicted and found guilty of criminal tax evasion.

Greve lost his appeal to Federal District Court and then appealed to the 7th Circuit filing a motion to suppress and dismiss his statements to the IRS agents based on 5th Amendment violations of his right to remain silent. Greve contends in his motion that Luke affirmatively mislead him by continuing to conduct a civil audit after she had firm indications of fraud. Specifically, Greve maintains that Luke made false promises to him by repeatedly advising him that his cooperation would result solely in a civil tax assessment. This allegedly caused Greve to talk too much in violation of his 5th amendment right to remain silent in a possible criminal proceedings. The Court did not agree.

Although the IRS regulations require a civil investigator to cease her investigation when she has developed firm indications of fraud, see Internal Revenue Manual §§ 4565.21(1), 9311.83(1), we have held that “[a] failure to terminate a civil investigation when the revenue agent has obtained firm indications of fraud does not, without more, establish the inadmissibility of evidence obtained by [the agent] in continuing to pursue the investigation.” United States v. Kontny, 238 F.3d 815, 820 (7th Cir.2001). Based on this interpretation of Kontny, the Court found for the US Government. United States wins, Greve loses.

Moving to Kontny, the facts are simple: The Kontnys owned an equipment supply business. For over 10 years they defrauded the government of payroll and income taxes by not reporting overtime of their employees to the IRS. The employees knew about this scheme and benefited as well. However, as a result of a labor dispute, one of the disgruntled employees informed CID of the IRS about the scheme. CID assigned civil agent Furnas, who know all about the CID involvement, to investigate Kontny’s tax return. Kontny talked with Furnas before hiring legal counsel. Partly due to his excessive chatter with Furnas, Kontny was convicted of tax fraud and sentenced to jail. Kontnys motion to suppress his statements to Furnas based on the 5th amendment right to remain silent was denied by the District Court and Kontny appealed to the 7th Circuit where his motion was denied.
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Judge Posner’s Opinion was that Kontnys talking to Furnas was voluntary and therefore not protected by his 5th amendment right to remain silent. The Court notes that virtually all cases involving coerced confessions involve the questioning of a suspect who is in police custody, an inherently intimidating situation in which people find it difficult to stand up for their rights or even to think straight. The situation is different when a person who does not even know that he is a criminal suspect (that is a premise of the Kontnys’ appeal) is being interviewed in his home, and by a civil rather than a criminal investigator to boot. Furnas was unarmed, un-uniformed, unaccompanied. The Kontnys were at no disadvantage in dealing with him. They were under no pressure to answer his questions. Any answers they gave were voluntary. Trickery, deceit, even impersonation do not render a confession inadmissible, certainly in noncustodial situations and usually in custodial ones as well, unless government agents make threats or promises citing a pre Miranda case, Frazier v. Cupp, 394 U.S. 731. United States wins, Kontny losses.

But what if you never see or talk to the IRS during the audit because you retain the non-attorney tax preparer who prepared your tax returns to represent you in the audit, just like former Judge Diane L Kroupa did in US VS Kroupa USDC (2016) District of Minnesota Case No 0:16-cr-00084. Kroupa , a former tax court judge no less, was accused of various tax crimes involving false information she was sending to her tax preparer. She was indicted and pled guilty to one count of impeding, impairing, obstructing and defeating the lawful functions of the US Department of Treasury in violation of US Code Section 371. More specifically Kroupa gave false information to her non attorney tax preparer, who then in turn gave the false documents to the IRS. During the routine audit, the tax preparer claimed to be unaware that these documents were false and clearly testified against Kroupa. While the outcome might have been very different if a tax attorney represented Kroupa at the very beginning of the audit, the facts show unfortunately for Kroupa that no tax attorney had ever been retained. United States wins, Kroupa loses.

In conclusion, it appears to me that if you get audited by the IRS in 2017 and you have sufficient assets to protect and rather complex structures and tax strategies to explain, best practice would be to have your tax attorney do the talking. Better yet, have your tax attorney prepare your personal and business tax returns and have that same tax attorney guarantee that she will be there years later during an audit to do the talking. A good tax attorney during the routine audit examination will represent you, effectively communicate with the Government agents, keep you safe, your assets preserved and your family protected to keep that IRS Criminal Tax Audit far away from your door.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.

Kindest regards
Chris Moss CPA Tax Attorney

Audit, Criminal, IRS, Tax

Dec 31

IRS Virgin Islands Bona Fide Resident Audit

By Chris Moss CPA Tax Attorney in IRS Virgin Islands Audit, US Virgin Islands Bona Fide Resident

IRS VIRGIN ISLANDS BONA FIDE RESIDENT AUDIT

12/31/2016

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Welcome to TaxView with Chris Moss CPA Tax Attorney

Are you moving to the US Virgin Islands in 2017 and looking for that exciting 2016 year-end tax strategy? There are many tax advantages of claiming to the IRS that you are a bona fide resident of the US Virgin Islands including you receiving tax free income. While you’re there, structure a Virgin Island replacement investment section 1031 tax free exchange. But be wary of dangerous landmines ahead which will explode into an IRS US Virgin Bona Fide Resident Audit that will take all the joy out of you and your family living in paradise. Indeed the IRS is just waiting sometimes until after you die as happened to the late Travis L Sanders to audit your estate tax returns arguing that you (now deceased) were never a “Bona Fide Resident” and therefore were not entitled to all that tax free living over the years. So if you are interested in moving to the US Virgin Islands to take advantage of all that tax free income you can earn over there, stay tuned to TaxView with Chris Moss CPA Tax Attorney, to find out you can obtain that coveted bona fide resident status and at the same time bullet proof your tax returns when the IRS commences its dreaded US Virgin Island Bona Fide Resident Audit.

In order to understand how difficult it is to become a US Virgin Island Bona Fide Resident, let’s jump right into a recent US Tax Court case Travis L Sanders vs IRS, 144 T.C. No. 5 US Tax Court January 2015. The facts are complex. Sanders became a partner in 2002 of a limited partnership Madison, a designated service business in the US Virgin Islands providing scientific, electronic, investment, economic and management consulting to businesses in the United States. Section 934(b)(1) of the IRS Code allows for tax free income from sources within the Virgin Islands provided that the owners of the company maintain residency there.

During 2003 and 2004 Sanders through various trusts, LLCs and other businesses, and claimed residence on a yacht in the Virgin Islands. Tax returns were filed with the Virgin Island Internal Revenue Department (VIBIR) for tax years 2002 2003 and 2004. On each tax return Sanders reported his home to the Virgin Islands and claimed an Economic Development Commission credit claiming that his interest in Madison allowed him to “reduce his income tax liability by 90% of the income tax attributable to Madison”. Simultaneous to Sanders personal tax return filings, Madison filed partnership returns with VIBIR for the same years listing Sanders as a partner.

On November 30, 2010 the IRS issued a tax bill to Sanders for almost $1M claiming he was not a bona fide resident of the USVI for the years 2002-2003 and 2004. Sanders appealed to US Tax Court in Sanders vs IRS 144 T.C. No 5 (2015). The IRS in Court claimed that all transactions of Madison lacked economic purpose and substance and therefore Sanders was not entitled to tax free recognition during those years. More importantly the Government claimed Sanders was not entitled to file tax returns with VIBIR but instead Sanders had to file his tax returns with the IRS in Philadelphia. Sanders claimed the statute of limitations had run citing IRS Code Section 6501. But the IRS reasoned to the Court that the statute of limitations had not run because no tax returns were ever filed citing that same section 6501. Judge Kerrigan of the US Tax Court was therefore faced with two key sequential questions presented to the Court: Whether Section 6501 period of limitations expired before the US IRS mailed its tax bill to Sanders and as a logical second follow up question whether Sanders filed a tax return.

The Court acknowledged that under Section 932(c) a bona fide resident is only required to file his tax returns with VIBIR and such a filing starts the statute of limitations running citing Senate Finance Committee report stating that all bona fide Virgin island residents will file their returns with VIBIR quoting from within the S.Report No 99-313 (1986).

Judge Kerrigan then reviews 11 factors that determine whether a taxpayer’s claimed residency in any foreign country is “bona fide citing Sochurek v Commissioner, 300 F.2d 34 (7th Cir 1962). The 11 factors are 1. Intention of the taxpayer, 2. Establishment of a home in the foreign county, 3. Participation in activities, 4. Physical presence in the foreign country, 5. Nature, extent, and reasons for absences from temporary foreign home, 6. Assumption of economic burdens and payment of taxes to the foreign county, 7. Status of resident contrasted to transient or sojourner, 8. Treatment accorded his income tax status of his employer, 9. Marital status and residence of his family, 10. Nature and duration of employment and 11. Good faith in making the trip abroad. The 11 factors are then grouped into various broad categories, intent, physical presence, social, family and professional relationships and the taxpayers owns representations, citing Ventro v VIBIR 715 F.3d 455 (3rd Cir. 2013).

The Court then in a surprise ending- in just a few paragraphs no less- and without any substantial analysis of the facts, indicates that the majority of the 11 factors were favorable to Sanders, that Sanders was a bona fide resident of the US Virgin Islands for tax years 2002-04, that Sanders properly filed his tax returns with the VIBIR and indeed Section 6501 statute of limitations had run its course and therefore the IRS was out of time to audit Sanders. Sanders wins IRS loses.

But the story does not end here. because the Government appealed. Sure enough the Tax court decision was overturned and remanded back to the US Tax Court for further consideration by the 11th Circuit in Commissioner v. Estate of Travis Sanders, No. 15-12582 (Aug. 24, 2016) with the 11th Circuit noting that “the facts relied upon the Tax Court were insufficient as a matter of law to establish that Sanders was a bona fide resident….”

The 11th Circuit through an Opinion, written by Circuit Judges Jordan and Anderson and District Judge Dalton, gives examples of how the US Tax Court on remand should inquire about the 11 factors. For example, the Circuit Court said, it is true as the US Tax Court pointed out that Sanders had a physical presence in the US Virgin Islands. However, “physical presence” is an especially important factor to consider and the Tax Court should have spent more time on it as it specifically had related to Sanders. The 11th Circuit goes on to say that the US Tax Court did not address the “nature and extent” of Sander’s physical presence and therefore could not have properly weighed the physical presence factor. The Court instructed the US Tax Court on remand to determine how much time Sanders spent in the US Virgin Islands and when, if ever, his contacts with the island became sufficient to make him a bona fide US Virgin Island resident.

The 11th Circuit then went on to give one example after another of how the US Tax Court in fact failed to properly analyze all 11 factors and then vacated the Tax Court’s Opinion entirely. The Circuit Court directed the Tax Court on remand to make factual findings regarding the amount of time Sanders spent in the US Virgin Islands during each of those years, which would be critical in determining the extent of Sanders physical presence. Also important the 11th Circuit says to the Tax Court, would be factual findings regarding the nature of the time Sanders spent in the US Virgin Islands, including the nature of Sanders’s relationship with Madison (For example, Madison’s economic substance and business purpose, or lack thereof).”

What does this mean for any of you who are planning to move the US Virgin Islands in 2017? In my view this is great news coming from the 11th Circuit. Because as a result of this heightened scrutiny on US citizens claiming bona fide residency in the US Virgin Islands we now have specific guidelines strong enough to hold up in any court proceeding. How? With the help of your Tax Attorney you can easily use the 11th Circuit Opinion to create the evidence you now need in 2017 to prove years later when the IRS Virgin Island Bona Fide Audit will surely commence possible many years later.

Finally, include the 11th Circuit Opinion and future cases that support your bona fide residency in the Virgin Islands as the foundation upon which to build all your business structures and tax free income, having your tax attorney in detail apply each of the 11 factors one by one in your income tax return until you have bullet proofed your coveted bona fide residency prior to filing your return. You all can now relax perhaps at the Old Stone Farmhouse, knowing that your tax returns are bulletproofed from the dreaded IRS US Virgin Island Bona Fide Residence Audit.

Thanks for joining us for 2016 year-end tax planning on TaxView with Chris Moss CPA Tax Attorney.

Happy New Year!

See you next time in 2017 on TaxView.

Kindest regards
Chris Moss CPA Tax Attorney.

Bona Fide Resident, IRS Audit, US Virgin Islands

Jan 15

IRS Identity Theft

By Chris Moss CPA Tax Attorney in IRS IDENTITY THEFT

IRS Identity Theft

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Chris Moss CPA Tax Attorney

Welcome to TaxView with Chris Moss CPA Tax Attorney

Tax return identity theft is on the rise and will reach an all time high in 2016. Criminals or the perpetrators plan to illegally obtain your name and Social Security number, create phony W-2s and related forms, and file a bogus tax return before you can file your legitimate return. Many of these crooks are organized criminals who have figured out that it is easier to rip you off by filing a bogus tax return than robbing a bank or hijacking a car. These 21st century thugs are ripping off the US Government as well. Uncle Sam is losing millions of dollars if not potentially billions a year in bogus tax refunds and you the taxpayer are out in the cold if you are one of the unlucky taxpayers who get their identity stolen. Do you want to learn some basic prevention steps to keep your tax return safe from identity theft this year.? So stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out how to stop the perpetrators and protect and keep safe your tax return from identity theft in 2016.

The typical identity theft scheme is for the perpetrator to file an early tax return with your social security number and your name but a different address around February through March up to the first week in April. The bogus tax return always shows a refund from a bogus W2 for a company you don’t work with an address you don’t live at. The mailing address on the tax return could be a PO Box or an executive office suite or any rented house. Sometimes the address could be an abandoned or foreclosed property where there is an outside mailbox or a mail slot in the door with no occupants to get the mail.

Here is how the scheme works: For manual checks, the refund check comes to the designated address and the mail is picked up by the perpetrator. The check is then either forged and cashed or deposited into a legitimate account but with a fictitious owner. There could be hundreds if not thousands of these refunds for hundreds of taxpayers from the same address to which the perpetrator has stolen identities from. Currently the IRS has absolutely no mechanism to detect such mass refund requests originating from the same address. For electronic refunds, bank accounts are opened and then closed immediately after thousands of bogus refunds have been deposited with the money wired abroad without a trace. While the Government eventually discovers the identify theft when the IRS computer system matches the bogus W2 to the company you supposedly work for, that matching process does not happen immediately when the tax return is filed, but perhaps sometimes months later. By then the refund had already been issued and soon a few weeks later stolen by the perpetrator all prior to the IRS discovering the identify theft.

In addition the crooks know this crime must be a high volume scam to success. Criminals realize that many of their bogus tax returns will be delayed or questioned by the IRS. So when for example a few hundred of the refunds are received of the thousands of returns filed, the perpetrators close shop and move on. By the time the government investigates the crooks have moved on, new locations have been secured and the illegal operators get ready for the next year’s filing season to start the whole operation again.

How serious is tax return identity theft? IRS Commissioner Koskinen during a prepared speech on November 19, 2015 in Washington DC noting that “increasingly, these crimes are being perpetrated by sophisticated, organized syndicates. They’ve been able to gather almost unimaginable amounts of personal data from sources outside the IRS. They use this data to file fraudulent federal and state tax income returns, and claim huge refunds.” More specifically, the inspector general of the IRS indicate that bogus tax filings are in the millions with billions of dollars potentially at stake. A new proposed bill “Stop Identity Theft Act of 2015” calls for the Attorney General to: (1) make use of all existing resources of the Department of Justice (DOJ), including task forces, to bring more perpetrators of tax return identity theft to justice; and (2) take into account the need to concentrate efforts in areas of the country where the crime is most frequently reported, to coordinate with state and local authorities to prosecute and prevent such crime, and to protect vulnerable groups from becoming victims or otherwise being used in the offense.

What can you do right now? In addition to the obvious, which is filing as early as possible to beat the perpetrator to filing first, have your tax attorney continuously check on line with IRS Electronic Account Resolution (EAR) throughout tax season to make sure you are safe up to the moment you file your tax return. When your tax attorney will make her inquiry with the EAR portal prior to the tax return being filed, she will hopefully get a zero transcript indicated no tax return has yet been received by the Government. But beware if you file late and the response is like this one you will know there has been identify theft: Dear Tax Professional, Your office submitted a request for taxpayer information. We apologize for the inconvenience but we are not able to process your request at this time. Please have your client contact the Identity Protection Specialized Unit (IPSU) at 800-908-4490. Sincerely Yours Director, Electronic Products & Services Support.

What happens to you after your tax return has been filed by the identity theft perpetrator? While I hope you never have to call the Identify Theft Department of the IRS, once you get a hold of them you realize the road ahead is not going to be easy. You are required to complete Form 14039 Identity Theft Affidavit and submit copies of various documents like a passport and drivers license proving you are who you say you are. All documents and original tax return have to be submitted in a paper version and mailed either snail mail or overnight delivery. Processing takes up to six months or longer.

What can you do right now to prevent your 2015 tax return from being stolen from you when you file this Spring in 2016? First and most important, file early in 2015. There is no better way to stop identity theft than to file early. What if you have not received your K1s yet or other supporting documentation. By all means have your tax attorney record the information direct from the issuers of the K1s by phone or emails. Create a fairly accurate record of what your K1 will show. File early and true up any small immaterial differences the following year. Disclose to the Government what you are doing in your tax returns prior to filing and explain you are filing early to avoid identity theft.

Second, if you move, please have your tax attorney notify the IRS of your new address. Call the government and make sure they have your new address on file before you file your tax return and explain that you are concerned about identify theft. Tell your CPA Attorney you are concerned about identify theft so your tax professional will check up on your account throughout the year. Never give your entire social security number to anyone on the phone. Vendors will be happy to have you call them back to verify who they are before you give them your social security number.

Perhaps sometime soon, the Government will refuse to refund any money to anyone based on a filed income tax return until the taxpayer’s identify is confirmed either by a follow up phone call or a special PIN# identification entered by email or text. This security identification process would significantly delay you all from receiving your refunds but would dramatically reduce the high volume of identify theft in 2016. When you compare the inconvenience of delayed refunds to the absolute nightmare of having your tax return hijacked by criminals I would choose the delay of having my identify confirmed. If you agree with this approach, ask your tax attorney to communicate with your elected officials about your concern with tax return identify theft. Together we can help the IRS fight back against tax return identity theft and help you all keep your tax returns secure from theft.

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.

Kindest regards from Chris Moss CPA Tax Attorney

IRS IDENTITY THEFT

Jan 01

IRS Charitable Deduction Audit

By Chris Moss CPA Tax Attorney in charitable deduction, Charitable Donation, Charity, IRS Charitable Deduction Audit

Welcome to TaxView with Chris Moss CPA Tax Attorney

All taxpayers at one time or another have made tax deductible charitable donations under IRS Code 170. But would your charitable deduction hold up during an IRS Charitable Deduction Audit? While Façade Easements were recently the focus of IRS Charitable Deduction Audits, the IRS in addition to disallowing Façade Easements deductions still routinely disallows your normal cash and noncash donations during an IRS Charitable Deductions Audit. In fact, the IRS is just as likely to commence a regular and routine IRS Charitable Deductions Audit against you in many cases years after you file your tax return. So if you have made a donation to your favorite charity and plan on deducting these donations on your 2015 income tax return in accordance with IRS Code 170, stay tuned to TaxView with Chris Moss CPA Tax Attorney to learn how to comply with Government regulations for legal record keeping of cash and non-cash charity donations, and see where IRS Charitable Deductions Audits are trending in 2016 so you can make sure you don’t lose an IRS Charitable Deduction Audit headed your way soon.

Regarding noncash donations to Purple Heart, Goodwill, Salvation Army and other similar organizations, the IRS seems to be just waiting to disallow all these deductions during an IRS Charitable Deduction Audit just as they did to Kenneth and Susan Kunkel in Kunkel v IRS US Tax Court 2015. The Kunkels deducted on their 2011 Sch A tax return noncash charity donations of $37,315 comprised of household items, books, clothing, furniture, and toys donated to the Lutheran Church, Goodwill Industries, Purple Heart, and Vietnam Veterans. The Government not only disallowed the whole deduction in an IRS Charitable Deduction Audit claiming the Kunkels had lack of substantiation but also hit the Kunkels with an accuracy related penalty plus interest. The Kunkels fought back appealing to US Tax Court in Kunkel v IRS US Tax Court 2015. Indeed the Kunkels produced for the Court the receipts given to them by the various organizations and in my view very detailed spreadsheets of exactly what they had contributed but unfortunately this wasn’t good enough to overrule an IRS Charitable Deduction Audit.

Judge Lauber of the US Tax Court observed that Section 170 indeed allows the Kunkels to deduct their charity contribution, cash or noncash, made within the taxable year to a charitable organization. However charity cash or noncash deductions are allowed only if the Kunkels can satisfy statutory and regulatory requirements of 170(a)(1) and Regulation 1.170A-13. Whether cash or noncash, if you make donation over $250 you must obtain a contemporaneous written acknowledgement from the charity. For a noncash donation that exceeds $500 then you are subject to even more rigorous substantiation requirements, and finally if the noncash donation is higher than $5000 you are subject to highest substantiation requirement including a qualified appraisal which must be included in the tax return prior to filing.

The Court also noted that similar items of property must be aggregated in determining whether the noncash gift exceeds the $500 and the $5000 thresholds as per Section 170(f)(11)(F). While clothing, jewelry, furniture, electronic equipment, household appliances or kitchenware are considered separate categories the Government in an IRS Charitable Deduction Audit in many cases aggregates as much of your donation as they can into one category so that they can push you into the next more rigorous substantiation threshold. Unfortunately for the Kunkels the Court aggregated their donations in 2011 to add up to $21,920 for clothing, $8000 for books, which subjected them to the $5000 threshold. The rest of the donations were aggregated over the $500 category threshold. There was little that the Kunkels could do to dispute these groupings because their tax return lacked contemporaneous evidence within the tax return itself.

The Court went on to list the requirements of any contribution (cash or noncash) over $250. There must be a “contemporaneous written acknowledgment of the contribution by the charitable organization citing Weyts v IRS T.C.Memo 2003-68. The charity also must give you a description of any property other than cash, and whether or not you received any goods or services back from the charity. If you did receive some sort of goods or services back from the charity, then the charity must provide you a good faith estimate of the value of those goods and services. Finally and most importantly the evidence that you receive in form of documentation from the charity must be “contemporaneous”. In other words the facts will have to show perhaps later that you had all your documentation in your possession by the date you filed your tax return.

For noncash donations, the documented facts are a much difficult to gather contemporaneously but nevertheless essential to you winning an IRS Charitable Deduction Audit. As an example, Goodwill, Purple Heart and Salvation Army usually pick up clothes and other household goods direct from your doorstep, in many cases when you are not at home leaving a receipt hanging on your door handle. While the Court acknowledged that at times it might be difficult to obtain the required documentation, when property is left at a charity’s unattended drop site, the Court nevertheless placed on Kunkel the burden of obtaining the necessary documentation prior to them filing their tax return.

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The Court was not without compassion for the Kunkels charitable intent, and conceded that “no doubt the Kunkels did donate some property to charity in 2011.” But the Court concluded that the IRS Code imposes a series of increasingly rigorous substantiation requirements for larger gifts, especially when the consist of household property rather than cash and that the documentation required by law was simply not present in the Kunkels 2011 tax return that they filed with the Government. Indeed, the Court also found the Kunkels negligent in filing a tax return without supporting documentation and hit them with a substantial Section 6662(a) penalty plus interest. IRS wins, Kunkels lose.

So how can you win an IRS Charitable Deduction Audit if you have noncash donations in excess of $500? First, have your tax attorney include in your tax return the facts and evidence you need to win an IRS Charitable Deduction Audit. Best practice for larger noncash donations would be insert the required documentation into tax return itself prior to filing to prove that the evidence was contemporaneously created. Second, do not make the donation if the charity cannot give you the IRS required information. If you don’t have the facts on your side simply don’t take the deduction. Not only are you not going to win the audit without the facts and evidence contemporaneously documented in your tax return, but you will also get hit with a substantial negligence penalty plus interest. Finally, if the charity cannot give you the required documentation simply consider donating to another similar charity which perhaps can provide you the required government documentation to sustain an IRS Charitable Deduction Audit. After you file your tax return with the required facts and evidence you can then sit back and relax, knowing that when the IRS Charitable Deduction Audit commences, perhaps years later, you are going to win big.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.

Kindest regards and happy New Year 2016 from Chris Moss CPA Tax Attorney

IRS Charitable Deduction Audit

Dec 01

IRS Offset Tax Audit

By Chris Moss CPA Tax Attorney in IRS Offset, IRS Offset Tax Audit, IRS Passport Confiscation

Welcome to TaxView with Chris Moss CPA Tax Attorney

Have any of you ever had your income tax refund from the IRS or your social security retirement income intercepted by the Government because you owed income tax or child support or were in default on your student loan? Unfortunately for those Americans who owe taxes there are more offsets coming your way. Just weeks ago Congress passed H.R 22 Surface Transportation Reauthorization and Reform Act of 2015 which allows the Government to confiscate your Passport if you owe back income tax. Many feel the Government is overstepping its collection powers in restricting international travel as if you had been indicted in a criminal investigation and being ordered by a Federal Judge to surrender your passport so you don’t flee the country before trial. So stay with us here in TaxView with Chris Moss CPA Tax Attorney to see where the IRS Offset Tax Audit is trending in 2015 and beyond and what you need to do now to protect yourself against an IRS Offset Tax Audit.

The Government Accountability Office (GAO) has been conducting ongoing studies called “High Risk Enforcement of the Tax Laws” for years, but the March 2011 study entitled Federal Tax Collection, “Potential for Using Passport Issuance to Increase Collection “appears to be the basis of Congressional legislation to revoke passports of folks who owe income tax. The 21 page study claims that there were 224,000 individuals issued passports in 2008 who owed a total of $5.8 billion in unpaid Federal taxes. The report concludes that because Federal law already allows linkage of debt collection to passport issuance in the area of Child Support Enforcement there is reason to believe the same linkage can be made to delinquent taxes.

From this GAO study a consensus in the Senate seemed to take hold that it was time to add passport confiscation for taxpayers who owe income tax to the Government. Who authored the provision in Senate Bill 1813 revoking or denying a passport to anyone who owes certain unpaid income taxes to the Federal Government? A Forbes article claims Senator Harry Reid originally proposed the idea to Orin Hatch and links a Press Release from Senator Orin Hatch as the source.

Regardless of who inserted the provision, the bill cleared the Senate 65-34 on July 30, 2015 and passed in the House 363-64 on November 5, 2015 with the passport provision still intact. HR 22 Surface Transportation Reauthorization and Reform Act 2015 was then sent to Conference last week. The bill left Conference and was approved by both Houses 359-65 in the House and 83-16 in the Senate on December 3 2015 and was sent to the White House for President Barack Obama’s signature. The President signed the bill this week and HR22 FAST Act is now law. Section 32101 of the bill Subtitle A Tax Provisions requires that Section 7345 will be added to the IRS Code, requiring the Secretary of the Treasury to transmit to the State Department in accordance with the Passport Act of 1926 a request the passport of any individual who has a seriously delinquent tax debt be revoked. More specifically, HR22 Fast Act reads in part “If the Secretary receives certification by the Commissioner of the Internal Revenue Service that any individual has a seriously delinquent tax debt in tan amount in excess of $50,000, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation or limitation of a passport pursuant to Section 32101 Subtitle A of FAST Act HR22.

Some scholars are questioning the Constitutionality of revoking a passport for back taxes owed. A February 2015 Penn State Law Review article by Gancarlo Seratto points out that Passport revocation is usually reserved for criminals or individuals who pose national security risks. But as the GAP study points out there are certainly similar statutes as described in 22 CFR 51.60 which requires the State Department to deny the issuance of a passport to any applicant who has been certified by the Secretary of Health and Human Services to be in arrears of child support. For example, the Passport Denial Program (PDP) established by Federal law in 1997 requires that if you are owe more than $2500 in back child support your passport will be restricted and revoked.

So assuming the law is deemed Constitutional, if your passport can be revoked for back child support or back taxes, can your passport also be revoked for other Federal infractions. While 31 USC 3716 specifically excludes and exempts Title IV delinquent unpaid student loans all other student loans backed by the Government are subject to offset. Indeed, as far back as 1983 the Senate Finance Committee Subcommittee on Oversight of the IRS had a hearing specifically addressing Tax Refund Offset Program for Delinquents Student Loans.

In canadian generic cialis other words, they don’t care what you say or think at all, or if you come back. Bile and pancreatic juice enter the small intestine through this cialis in australia important valve. Right dosage of Kamagra: It is very important to take the appropriate medicine for their tadalafil cialis from india issue and so make sure that you get it from a reliable source. Modern researchers have also found it to be very effective for treating premature ejaculation and can be relied on for boosting cialis online uk your mood or improving your sex life, exercise can help you with your sex life! By exercising your will be more confident with your body and have better endurance which may lead to more fulfillment in the bedroom. One more point: What about taxpayers who have not filed tax returns? It appears that there is no provision in HR 22 for Americans who have joined the underground economy and have not filed income tax returns for many years. Perhaps an income tax nonfiler for 3 successive years should also lose his or her Passport?

In conclusion, regardless of whether you agree or disagree with expanding the Government offset program to Passports, there is no question that the ever expanding US Government offset program will keep growing its collection of enforcement tools against Americans who owe back taxes to the IRS. One may ask what could be next on the horizon of Government offset enforcement if you are a delinquent taxpayer. What about Professional licenses? Government Contracts? Drivers Licenses? Or simple Business Licenses? What about denial of Federal Home Loan approved mortgages, low income housing or even Federal subsidized health care?

What can you do now? The best advice is to hire the best tax advisors you can afford, pay your taxes in full and timely file your tax returns each year knowing with confidence that you can withstand any IRS Offset Tax Audit the Government throws your way.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS Offset Tax Audit, Offset Tax Audit, Passport Confiscation

Nov 27

IRS Marijuana Tax Audit

By Chris Moss CPA Tax Attorney in IRS Marijuana Tax Audit, Marijuana Tax Audit

Welcome to TaxView with Chris Moss CPA Tax Attorney

There are 23 States and the District of Columbia that have legalized Marijuana for medicinal use, with Colorado, Washington, Oregon and Alaska allowing legal recreational use as well. Previous articles on Marijuana Income Tax Law and IRS or State Law for Medical Marijuana need updating due to IRS Marijuana Tax Audits the Government is sending over to California and Colorado in early 2016 . If you are in the retail, wholesale, growing, or distribution side of the Marijuana industry, you are going to be faced with an almost certain annual IRS Marijuana Tax Audits of your 2015 business and personal tax returns, so stay with us here on TaxView with Chris Moss CPA Tax Attorney to learn how to best protect your Marijuana business from adverse Government action when the IRS Marijuana Tax Audit hits your business

IRS Code Section 280E allows no income tax deduction for any trade or business dealing in Federal scheduled controlled substances, and herein lies the problem for anyone connected with the Marijuana industry. Even if your State has legalized Marijuana, Government enforcement of Section 280 still results in draconian amounts of tax owed by business owners after an IRS Marijuana Tax Audit. That is until California Helping to Alleviate Medical Problems known as CHAMP decided to fight back. After Champ was audited by an IRS Marijuana Tax Audit in 2002, the Government determined that all of CHAMP’s expenses including its Costs of Good Sold, were nondeductible under Section 280E in connection with the trafficking of a controlled substance. CHAMP appealed to US Tax Court in CHAMP v IRS US Tax Court (2007).

The IRS argued that all of CHAMP expenses were in connection with the illegal sale of drugs and therefore all expenses were nondeductible under Section 280E. Judge Laro disagreed as to Cost of Goods Sold. Citing the Senate Finance Committee report, the Court found that Cost of Goods Sold would be exempt from 280E in order “to preclude possible challenges on constitutional grounds.” Senate Finance Report S. Rept. 97-494 (Vol. 1). In addition the Court allowed expenses for nonrelated Marijuana ancillary services for counseling and caregiving because the books and records were adequately able to separate out those expenses. Both CHAMP and IRS had partial wins.

Because CHAMP did not appeal there was no higher Court precedent until Martin Olive and his infamous California Vapor Room got hit with an IRS Marijuana Tax Audit for 2004 and 2005 disallowing all his expenses. Olive appealed to US Tax Court in Olive v IRS US Tax Court (2012). Judge Kroupa easily distinguishes Vapor Room from CHAMP in that CHAMP was a service organization with 72% of its employees working exclusively with caregiving. The Vapor Room business model stresses solely the sale and consumption through vaporization of marijuana. The Court finds for the Government concluding that Section 280E disallows all Vapor Room expenses except for Cost of Goods Sold.

Judge Kroupa of the US Tax Court found Olive’s testimony and the testimony of the other witnesses on the Cost of Goods Sold to be “rehearsed, insincere and unreliable” and also found that the ledgers were not accurate due to Olive transacting his entire business in cash. The Court noted that Vapor Room grossed at least $1.9M in 2004 and $3.3M in2005. The Court estimated Cost of Goods Sold at 75.16% of sales for 2005 based on expert testimony of Dr Gieringer that the Cost of Goods Sold of medical marijuana dispensaries ranged from 70-85% of sales resulting in a tax bill of over $1.1M for 2005 alone.

Martin Olive appealed in Olive v IRS (9^th Cir California) relying again on CHAMP. The Court found Olive’s reliance on CHAMP was misplaced. CHAMP had not only of medical marijuana business, but also ran an extensive counseling and caregiving service. This is not the case in Vapor Room were the sole business of Olive was to engage in selling medical marijuana. The Court concluded that if Congress now thinks that the policy embodied in 280E is unwise as applied to medical marihuana sold in conformance with California law it can change the statute. This Court cannot. IRS wins Olive loses.

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Judge Mueller after careful consideration of the expert witness testimony presented at the evidentiary hearing, joined the chorus of other courts considering the same question, and concluded the issues raised by Picard are policy issues for Congress to revisit if it chooses. Judge Mueller in a brilliant conclusion opines: “At some point in time, in some Court, the record may support granting such a Motion, but after having carefully considered the facts and the law as relevant to this case, the Court concludes that on the record in this case, this is not the Court and this is not the time. US Dept. of Justice Wins, Pickard and others all lose. It appears that Pickard not appealed to the US Court of Appeals for the 9^th Circuit at this time.

So as we head to 2016 there is one thing certain. Unless you are all properly prepared, the IRS Marijuana Tax Audit will be devastating to all in the Marijuana industry. What can you do now? First, the only hope of deducting expenses other than your Cost of Goods Sold is to on advice and approval of your Tax Attorney make sure those unrelated expenses are perfectly recorded through a separate LLC with QuickBooks or similar accounting software creating your books and records. Make sure your tax experts separate out revenue from those activities allocated accordingly and all cash deposits should be clearly separated in separate bank accounts if they are unrelated to Marijuana sales. Second, again on advice and approval of your Tax Attorney record all cash sales and report all income. If you cannot secure a bank willing to do business with your Marijuana cash business then create again with consent of your Tax Attorney a Management LLC to accept the cash with the offset to management fees. Finally you will most certainly be subject to annual IRS Marijuana Tax Audits, so make sure when you file your tax return you have your Tax Attorney who prepares your return ready to represent you on the IRS Marijuana Tax Audit, all the way up to the US Tax Court and Federal Appeals Court if necessary. In conclusion, it appears until Congress changes the law, it is not going to be as easy as you all thought years ago, but at least you have now a fighting chance of at least partially winning the battle against the IRS Marijuana Tax Audit sure to come your way soon.

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS Marijuana Tax Audit, IRS Section 280E, Marijuana Tax Audit

Nov 26

IRS Lease to Buy Audit

By Chris Moss CPA Tax Attorney in IRS Lease to Buy, IRS Lease to Buy Audit, Lease to Buy Audit, Section 167

Welcome to TaxView with Chris Moss CPA Tax Attorney

For any of you out there who have converted a commercial lease to a purchase your accountant has likely capitalized the cost to terminate the lease increasing your basis in the property buy out. Most likely your business income tax return was also prepared based on these capitalized costs in accordance with IRS Code Section 167 or perhaps amortized under Section 197. However, there is good news in recent Court rulings regarding Federal income tax rent deductions when you convert your lease to a purchase and pay large upfront lease termination fees that you can deduct in full in the year you paid those fees. But watch out for the IRS Lease to Buy Audit sure to come your way requiring you to capitalize all those expenses in accordance with Code Section 167. So if you are leasing a building or warehouse with a lease to buy option in your future plans, and you want to take advantage of this new Court approved tax deduction when you exercise your lease to buy options, stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out where lease to buy tax deductions are trending in 2015 and how to protect your expense in lieu of additional rent deductions from being disallowed during an IRS Lease to Buy Audit.

IRS regulations require capitalization of all acquisition costs to purchase a building whether it be amortization under Section 197 Intangible, or depreciation under Section 167 and also require capitaliziation if the property you are purchasing is “subject to a lease”. So it would not surprise me if most accountants capitalize the cost of lease buy out conversion under IRS Code Section 167(c)(2).

But ABC Beverage Corporation which makes and distributes soft drinks and other non-alcoholic beverages at its bottling plant in Hazelwood, Missouri took a different approach. On its 1997 tax return ABC claimed a business expense deduction of $6.25M which they claimed on their tax return was the buyout cost of the lease negotiated with the Landlord in lieu of additional rent over the term of the lease. The Government audited ABC and commenced an IRS Lease to Buy Audit disallowing the enter $6.25M deduction sending ABC a bill for $2.5M in back taxes. ABC paid the tax and then brought suit for refund in ABC Beverage vs United States 577 F Supp 2d 935 (WD Michigan 2008).

ABC’s argument to District Judge Paul Maloney was that their buy out was similar to 6^th Circuit’s Opinion in Cleveland Allerton Hotel, Inc. v. Commissioner, 166 F.2d 805 (6th Cir. 1948). In that case Cleveland had a lease with roughly 80 years left on the term. Cleveland purchased the building after negotiating a buy out with the Landlord and claimed a tax deduction as business rent expense claiming when the IRS audited that the deduction was not to purchase real estate but to be “relieve them of an important rental obligation” which could accurately be measured by the difference between the fair value of the real estate and what Cleveland paid to purchase the property.

The Government in Cleveland claimed under IRS Code Section 167 or in the alternative Section 197 the deduction should have been capitalized as part of the purchase price to acquire the property. But Circuit Judge Simons found for Cleveland opining that Cleveland is not a third person investor buying real estate, but rather had a liability in a lease it wished to extinguish and it simply paid liquidated damages to the Landlord for release from its long term lease not to buy the property but to allow the lease to be terminated. District Judge Maloney found for ABC as did Judge Simons rule for Cleveland, and the Government appealed to the 6^th Circuit in ABC Beverage Corp. v. U.S., 113 AFTR 2d 2014-2536 (CA6 2014).

The Government’s main argument on appeal was that Section 167 required that property “subject to a lease” was required to be capitalized, further arguing that ABC should simply depreciate or amortize the deduction as required by Section 167 or Section 197. The Government supported its position citing Woodward v Commissioner, 397 U.S. 572 (1970), Commissioner v Idaho Power Co., 418 U.S. 1 (1974), and INDOPCO, Inc. v Commissioner, 503 U.S. 79 (1992) and finally asking the 6^th Circuit to overturn the out of date 65 year old Cleveland case. But Circuit Judge Cole opines that the facts in all those cases are not controlling and therefore do not warrant the Court to overturn Cleveland.
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Circuit Judge Cole after review of all the evidence found that the Cleveland and ABC expense was a cost to extinguish liability to the Landlord prior to the purchase of the property and Congress did not intend Section 167 to apply to these specific facts. Absent other indication from Congress, the Court ruled that property was not “acquired subject to a lease” if the purchase extinguished the lease. ABC’s purchase was not acquired subject to a lease and therefore ABC wins, IRS loses.

OK now what does this say to all of you out there with lease to buy options? First, your tax attorney needs to have the language inserted in the lease to buy option prior to executing your lease that any additional expense in lieu of continued rent will be tax deductible as what I would call additional rent to extinguish lease citing the ABC case law in the applicable lease paragraph allowing for the buy out to purchase the building. Second, have your tax attorney include in your tax return his contemporaneously prepared opinion on why Section 167 does not apply to your specific facts and perhaps even include the applicable lease provision in the tax return prior to filing. Finally sit back and enjoy your new real estate purchase including your fully deductible additional rent to extinguish lease which has allowed you to substantially reduce your income tax. You can now relax knowing you have contemporaneously created facts and Court rulings and Opinions supporting and bullet proofing your tax return to win the likely IRS Lease to Buy Audit coming your way soon.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS Lease to Buy Audit, Lease to Buy Audit

Nov 25

IRS Mortgage Interest Audit

By Chris Moss CPA Tax Attorney in IRS Mortgage Interest Audit, Mortgage Interest Deduction, Mortgage Interest Limitation, Section 163 Mortgage Interest

Welcome to TaxView with Chris Moss CPA Tax Attorney

Just about all of us at one point or another have deducted mortgage interest as an itemized deduction allowed under IRS Code Section 163 on Schedule A of your Form 1040 tax return. IRS Publication 936 and IRS Regulations 1.163 allow a married couple or single individual to deduct interest paid on debt no greater than $1.1M or $550K each filing separately. That is until Charles Sophy and Bruce Voss two unmarried joint owners of a home decided to file a tax return claiming $1.1 Million each or $2.2 Million total. So if you are not married and jointly own a home stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out how in 2015 it appears that you are now able to deduct interest paid on $2.2 Million and learn how to protect that deduction from an almost certain IRS Mortgage Interest Audit perhaps many years later.

In 2002 Charles Sophy and Bruce Voss purchased a house in Beverly Hills California as joint tenants financed by $2.2 Million in debt. They filed a federal income tax return in 2006 and 2007 with all interest on over $2M in debt deducted on Schedule A of their personal 1040 Tax return. The IRS commenced an IRS Mortgage Interest Audit and disallowed all interest on debt over $1.1M. Sophy and Bruce appealed to US Tax Court in Sophy v IRS US Tax Court (2012).

Sophy and Voss argued to the Court that Section 163 limitations were applied per taxpayer with respect to co-owners who are not married and therefore they should be allowed interest on debt up to $2.2M. The Government argued that whether married or unmarried you still live in one house and get to use only one $1.1M limitation. Judge Cohen therefore had to decide whether or not the statutory limitation of Section 163 was properly applied on a per-residence or per-taxpayer basis where residence co-owners were as in the case of Sophy and Voss not married.

The Court reviewed the legislative history of Section 163 and concluded that because married couples filing separate returns had to split the exemption in half, so should unmarried couples. Sophy and Voss countered that Congress intended to create a special rule for married couples, the marriage penalty if you will, which should not apply to unmarried couples. Congress was silent on unmarried couples and therefore the marriage penalty should not apply to them. The Court ultimately found for the Government concluding that that nothing in the legislative history of Section 163 suggests that Congress had any other intention than to view mortgage debt on a per-residence basis. Therefore the per-taxpayer basis used by Sophy and Voss was overruled by the Court with a win for the IRS.

Sophy and Voss then appealed to the US Court of Appeals for the 9^th Circuit in Pasadena California filing on August 7, 2015, in Voss c. Commissioner 796 F.3d 1051 (9th Cir. 2015). An Amici Curiae brief was filed by Shannon Minter and Christopher Stoll of the National Center for Lesbian Rights and Sophy and Voss were represented by Sideman & Bancroft LLP of San Francisco and Hone Maxwell LLP of San Francisco. The Government was represented by Assistant Attorney Generals Keneally, Cohen and Schumann from the US Dept. of Justice Tax Division in Washington DC

Sophy and Voss continued to argue that the US Tax Court should be overruled because Section 163 debt limits apply to unmarried co-owners on a per-taxpayer basis. Circuit Judge Jay Bybee acknowledges that Section 163 is specific with respect to a married couple but notes the IRS Code does not specify whether in the case of residence co-owners who are not married the debt is limited per residence or per taxpayer. The gap in the Code is the source of the present controversy Judge Bybee opines.

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If Congress, the Court reasons, wanted to go further and ensure that two or more unmarried taxpayers were treated as a single taxpayer for purposes of Section 163, then Congress could have done that with specific language in the Code. The Court gave as an example Section 36 of the Code the First Time Homebuyer credit where unlike the mortgage debt interest limitation in Section 163, First Time Homebuyer credit Section 36 says “Married filing separately each can take $4000 of the total $8000 credit AND if two or more individuals who are not married purchase a principal residence, the amount of the credit can not exceed $8000”. The Court concluded that a per-taxpayer reading of the statute debt limit provisions is most consistent with Section 163 and Treasury regulation 1.163 as a whole. The Court therefore reversed Sophy v IRS US Tax Court (2012) and remanded back to the US Tax Court the job of determining in a manner consistent with the 9^th Circuit Opinion the proper amount of qualified residence interest under Section 163. Voss Sophy win, IRS loses.

But there’s more: Circuit Judge Ikuta writes a blistering dissenting Opinion claiming that the majority opinion allows unmarried taxpayers who buy expensive residences to deduct twice the amount of interest than married spouses would be allowed to deduct. The Dissent shows how over the years the IRS has promulgated numerous regulations and rulings showing how exactly unmarried taxpayers who jointly own a home can apportion the interest on the $1.1 M debt limitation of Section 163. Voss and Sophy’ s approach should be rejected because due respect and deference should be given the US Treasury interpretation of the statute citing Christensen v Harris 529 US 576 (2000). The Dissent called the Majority “an absurd” marriage penalty with the better solution being to defer to the IRS reasonable interpretation of the statute. Therefore Judge Ikuta concluded in his Dissent that he would affirm the US Tax Court below.

What does all this mean to any of you purchasing a home with debt of over $1.1M? First, in my view, even if you don’t live in the 9^th Circuit, if you are unmarried in 2015 and co-own a home together with a larger mortgage than $1.1M make sure you consult with a tax attorney before you file your 2015 income tax return. It sure looks at least for now until the other Circuits chime in that you will have a good chance of supporting an interest deduction on debt of up to $2.2 million. Second, have your tax attorney include in your tax return Voss c. Commissioner 796 F.3d 1051 (9th Cir. 2015) to support your position. Finally until Congress amends Section 163 and the other Circuits chime in, you should expect an IRS Mortgage Interest Audit within perhaps years after you file your tax return. With proper preparation and planning you will have an excellent chance to win an IRS Mortgage Interest Audit as did Voss and Sophy. Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView

Happy Thanksgiving 2015 from

Chris Moss CPA Tax Attorney

IRS Mortgage Interest Audit, Mortgage Intererst, Mortgage Interest Section 163, Section 163

Nov 22

IRS Capital Gains to Ordinary Income Audit

By Chris Moss CPA Tax Attorney in Capital Gain to Ordinary Income, IRS Capital Gain to Ordinary Income Audit

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Chris Moss CPA Tax Attorney

Welcome to TaxView with Chris Moss CPA Tax Attorney

Do any of you plan on selling land this year for a large gain under IRS Section 1221 which perhaps can be offset by stock losses in your brokerage account? Seems easy enough. But unfortunately the Government looks closely at your land sales when the IRS in many cases years later commences a Capital Gain to Ordinary Income Audit disallowing all your capital gain and converting those gains to ordinary income under IRS Section 61. When the audit is over, the IRS agent then explains to you that you owe a great deal of tax, interest and penalty now that your brokerage capital losses cannot offset ordinary income. So how do you protect your capital gain from converting to ordinary income when the IRS comes knocking on your door? Stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out how to bulletproof your capital gain from an IRS Capital Gain to Ordinary Income Audit.

Selling land, real estate or stock always results in a capital gain right? Well not quite always as is currently trending in 2015 and as Greg and Melanie Boree discovered in Boree v IRS US Tax Court (2014). The facts are simple. Boree purchased 1,982 acres in Florida with a 1.8M loan from Perkins State Bank in 2002, plans were submitted to the County and various lots were sold during the next 5 years. However, in 2007 a new investor Adrian Development purchased 1067 acres for $9,600,000 from Boree.

Boree recorded all lot sales from 2005, 2006 and 2007 on his income tax form 1040 Schedule C as ordinary income but the sale in 2007 to Adrian as long term capital gain. The IRS came visiting in 2011 and commenced a Capital Gain to Ordinary Income Audit, disallowing the entire capital gain resulting in a tax bill of almost $2M. Boree appealed to US Tax Court in Boree v IRS US Tax Court (2014).

Judge Foley cuts right to the core issue: Was the $9.6M sale of land part of inventory of a business or was this sale unique, different from the other sales to be treated as a capital asset held for investment. The Court notes that sales of lots were made to customers in the normal course of business from 2002 to 2007 and were frequent and substantial with no distinction made in the books and records to treat the Adrian sale any differently, citingSlappey Drive Industrial Park v US 561 F.2d 572 (5th Cir 1977). Indeed the Court concluded there was no evidence presented contemporaneously by Boree in his 2007 tax return that the Adrian sale was being considered for tax purposes “segregated from the rest of the property” as property held for investment. IRS Wins Boree Loses.

Timothy and Deborah Phelan had a very different experience in Phelan v IRS US Tax Court (2004) when the IRS came knocking on their door for a Capital Gains to Ordinary income audit. The facts are very complex so I have simplified as best I could as follows: Phelan purchased 1050 acres in Colorado in 1994 with possible plans for development. There were various agreements with the County, municipal town and other developers but no sales to the public. In 1998, Phelan sold 45 acres were sold to Elite Development and Vision Development for $1.5M and recognized a 1998 capital gain on his personal tax return. The IRS commenced a Capital Gain to Ordinary Income Audit and converted the capital gain to Ordinary income claiming that Phelan was in the business of selling real estate. Phelan appealed to US Tax Court in Phelan v IRS US Tax Court (2004) claiming he had no employees nor did he engage in any business activities outside of holding and selling a limited number of parcels with the ultimate hope of appreciation of the value of the land.

Judge Gerber easily finds for Phelan because the facts showed that other than the 2 sales in 1998 there was no other activity. The Court concluded that during the 4 years that Phelan held the land, the property did in fact appreciate according to plan and the investment goals had indeed been achieved by Phelan. Phelan wins IRS Loses.

Our final case involves Frederic and Phyllis Allen who in 1999 sold 2.63 acres of undeveloped real estate in East Palo Alto to property developer Clarum Corporation. He reported the sale as an installment sale as per the sales agreement with Clarum and in 2004 Allen received the final installment of $63K from Clarum. Allen did not report this income on his 2004 tax return. On advice of tax professionals Allen amended his 2004 return in 2008 reporting the $63K as long term capital gain. The IRS audited Allen’s amended return and converted the capital gain to ordinary income after an IRS Capital Gain to Ordinary Income Audit. Allen bypassed US Tax Court by paying the tax and then suing for a refund in US Federal District Court for the Northern District of California inAllen v US No 3.2013cv02501.

Judge William Orrick opines that the evidence is compelling that Allen intended to develop the property when he purchased the property and that he undertook substantial efforts to develop the property during the time he owned it. Even Allen in his own deposition indicated to the Court that his original intent was to develop the property. While Allen then argues to the Court in that same deposition that his intent changed over time, the Court found that Allen presented no credible evidence to prove that his intent changed, citing Tibbals v US 362 F.2d 266 (Ct Cl 1966). The Tibbals Court held that a taxpayer’s purpose can change based on the facts the taxpayer presents to the Court but Judge Orrick in Allenconcluded that because Allen provided no evidence that he had held the land for anything other than development the sale of the property therefore resulted in ordinary income. IRS Wins, Allen loses.

So for anyone out there planning to buy land, real estate or some other capital asset what can you do right now to protect your long term capital gain from ordinary income conversion when the IRS Capital Gain to Ordinary Income Audit commences years from now. First before you purchase your land have your tax attorney contemporaneously create the facts and evidence you will need to win an IRS Capital Gain to Ordinary Income Audit. Tibbal makes clear you need to prove to the Court that the purpose for which the property was acquired, the motive for selling it, the taxpayer’s method of selling the land, taxpayer’s income from the sale of it compared with his other income, the extent of the improvements made to facilitate the sale of it, the frequency and continuity of sales, and the time and effort expended by taxpayer in promoting the sales in relation to his other activities all must be factually presented as evidence to the Court in order to win against an IRS Capital Gain to Ordinary Income Audit. Second, after you purchase your land, feel free to outsource development to developers creating written extemporaneous documentation of your intent to sell property to those developers at some point in time but only after the land appreciates in value. Finally make sure the same tax attorney who represented you on both the buy and sell side of the transaction prepares and files your tax return claiming capital gain treatment of the sale. When the IRS Capital Gain to Ordinary Income Audit commences years later your tax attorney will easily be able to present the facts to the Court you will need to win the audit, keep intact your long term Capital Gain, and prevent the Government from taxing you at much higher ordinary income rates.

Thank you for joining us on TaxView with Chris Moss CPA Tax Attorney.

See you next time on TaxView.

Kindest regards,

Chris Moss CPA Tax Attorney

IRS Capital Gain to Ordinary Income Audit

Nov 19

IRS Legal Fees Audit

By Chris Moss CPA Tax Attorney in IRS Legal Fees Audit, Legal Fee Deduction, Legal Fees

Welcome to TaxView with Chris Moss CPA Tax Attorney

If any of you have incurred legal fees in 2015 perhaps you should consider a Legal Fees Tax Deduction? You are entitled to deduct civil or even criminal legal fees under Section 162(a) paid to an attorney in connection with your business. You can also deduct legal fees paid to an attorney as a miscellaneous itemized deduction under Section 67 if you bring legal action against your employer. Finally, you can deduct legal fees under Section 212 if you paid an attorney in connection with the production or collection of income or the maintenance of property held for the production of income. But the Government is aggressively reviewing your legal fee deductions in many cases years later during an IRS Legal Fees Audit, hoping to disallow much of your legal fees deductions. So stay with us here on TaxView with Chris Moss CPA Tax Attorney where you will learn how to deduct legal fees in 2015 by protecting those deductions with bullet proof evidence you will need years later to successfully defend your deductions during an IRS Legal Fees Audit.

The first and most important evidence you need is contemporaneously prepared legal invoices by your attorney detailing the kind of legal work you paid for as Parker Company found out in Parker v IRS US Tax Court (2012). The Parker business claimed $630,000 in legal fees paid to attorneys in 2003 in relation to the arbitration and the shareholder derivative suit. The IRS audited six years later in 2009 and disallowed all legal fees. Parker appealed to US Tax Court in Parker v IRS US Tax Court (2012) arguing the legal fees were ordinary and necessary trade or business expenses to defend shareholder derivative suits. However, the Court concluded that Parker could not substantiate most of the claimed legal fees. A ledger and two cancelled checks provided by Parker was not good enough. The Court allowed only $55K and disallowed $575,000. IRS Wins Parker Loses.

In addition to having the proper contemporaneously prepared legal invoices, make sure you know what IRS Code Section you are able to legally deduct your legal fees as Gary Lee Colvin found out in Colvin v US Tax Court (2004). Colvin paid an attorney in connection with State Court litigation against his primary residence homeowners association and paid the same attorney to sue his former employer to recover lost wages, however the attorney he paid never provided detailed invoices showing the kind of legal work he was paid for. Colvin deducted one total legal fee on his Schedule C business in 1997 and 1998. The IRS audited and disallowed all legal fees arguing that the legal fees were not ordinary and necessary business expenses and there was insufficient legal invoices to sustain the deduction. Colvin appealed to US Tax Court in Colvin v IRS US Tax Court (2004) arguing the legal fees were deductible under Section 212 to protect the production and collection of income. Special Trial Judge Dean easily finds for the Government noting that Colvin may not under Section 212 deduct legal fees that are personal expenses to protect his primary home as per Section 1.212-1(h). The Court concedes that legal fees to sue his former employer for lost wages would have been deductible but because there were no contemporaneously prepared legal invoices documented the nature of the legal work performed no deduction could be allowed. IRS wins Colvin loses.

Our next case Chaplin v IRS US Tax Court (2007), involves a professional fiduciary Philip Chaplin who worked for Rice Heard & Bigelow Inc (Rice) and was elected to the Board of Directors of Rice in 1987. Chaplin acted as a fiduciary for clients from 1988-1994, was provided a Rice credit card and was paid as an employee of Rice as per his employment agreement. Unfortunately Rice terminated Chaplin in 1994 and eventually in 1997 Chaplin filed suit against Rice alleging breach of contract and wrongful termination. The case settled in 2002 and Chaplin was paid $1.5M. Chaplin deducted legal fees on his 2001 tax return as an offset to the $1.5M. In 2005 the IRS audited Chaplin’s 2001 tax return and denied his legal fee deduction claiming that the legal fees were not deductible from adjusted gross income as business legal fees but rather unreimbursed employee expense legal fees under Code Section 67 to be deducted as miscellaneous itemized deductions subject to the 2% floor limitation. Chaplin appealed to US Tax Court in Chaplin v IRS US Tax Court (2007) Judge Haines easily finds for the Government concluding that Chaplin was clearly an employee not an independent contractor. IRS Wins Chaplin loses.

Our next case Brenner v IRS US Tax Court (2001) introduces us to Andrew Brenner employee of Nomura Securities from 1987 to his termination in May of 1996. Brenner sued Nomura and eventually settled in 1998 for $1.9M. In 1997, Brenner deducted $215,354 worth of legal fees as a miscellaneous itemized deduction under Section 67. But in 1999 he filed an amended return on advice of his accountants claiming his legal fees were part of his company corporate plan under IRS Section 62 and Regulations 1.62, which allowed that his legal fees be directly deducted as an offset to his $1.9 settlement income. The IRS audited and disallowed the adjusted the legal fees back to what they were on his original return claiming that Nomura was Brenner’s employer. Brenner appealed to US Tax Court in Brenner v IRS US Tax Court (2001) and Judge Halpern easily found for the Government because no lawyer’s bill was ever submitted to Nomura, and no itemization of specific bills or invoices was ever substantiated under Section 162-2(e)(3). Because Brenner did not provide the required documents to comply with Section 1.62-(2)(e)(3), Brenner’s only recourse was to deduct the legal fees under Section 67 as a miscellaneous itemized unreimbursed employee business expense on Schedule A of the original return as filed. IRS Wins Brenner Loses.

She can be levitra on line see for info just as abusive as a male batterer, yet people listening to battered men. To accelerate healing of inflammation canada in levitra do nightly applications of crushed cabbage leaves or overly ripe apples. If any of these components get disrupted, problems with sexual functioning may be cipla cialis india experienced. Whatever it would be, there is some concern free viagra on line that just joining in a study on women’s sex drive could enhance a woman’s sex drive, and it might have a placebo effect, or a suggestive influence on libido. Our final case is Butler v IRS US Tax Court (1997). The facts are simple. Butler purchased a farm in California and became involved with various law suits over water rights to protect and defend the title to his farm. Butler deducted his legal fees in 1991 1992 and 1993 under Section 162. The IRS audited disallowing all legal fees claiming the farm was not engaged in for profit within the meaning of Section 183, and therefore not deductible or in the alternative under Section 263 the legal fees were capital in nature to protect the title to the property and were also not deductible. Butler appealed to US Tax Court in Butler v IRS US Tax Court (1997). Butler claimed that at the legal fees where business expenses under Section 162 or in the alternative itemized deductions under Section 212 to protect is investment in the farm. Judge Gerger finds easily for the Government because Butler did not work the farm full time and that Butler lacked a profit motive. Therefore under Section 183 no legal fees could be deducted either under Section 162 or in the alternative Section 212. IRS Wins Butler loses.

As you can see, the US Tax Court does not allow legal fees to be deducted on your tax return unless you have well document legal invoices, a business connection under Section 162, unreimbursed employer expense under Section 67, or a clearly set up contemporaneous set of facts and evidence to prove the legal fees you paid to an attorney protected your income producing investment under Section 212. So how can you win an IRS Legal Fee Audit? First make sure you legal invoices are all specific enough to connect the legal service provided to the appropriate Code Section either Code Section 162, Section 67 or Section 212. Second make sure you retain a tax attorney to create contemporaneous documentation to insert into your tax return before you file to make sure the Government has disclosure of under what Section of the IRS Code you are claiming your legal fee deduction. Finally obtain from your trial attorney before you pay them their opinion on whether or not their legal fee is tax deductible. If they don’t know, perhaps they can retain a tax attorney to give her opinion prior to commencing litigation. You will be glad you did years later when the Government comes knocking on your door to commence an IRS Legal Fee Audit.

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

IRS Legal Fees Audit, Legal Fees, Legal Fees Audit, Legal Fees Deduction

Nov 18

IRS Bad Debt Audit

By Chris Moss CPA Tax Attorney in Bad Debt Deduction, IRS Bad Debt Audit

Welcome to TaxView with Chris Moss CPA Tax Attorney

How many of you all have ever loaned money or property through your business and have not been paid back? Have you ever loaned money or property to a friend and have not been paid back? Did you all know you can deduct either on your business or personal tax return a bad debt either as a business bad debt under IRS Section 166(a) and 166(b) or a nonbusiness bad debt under IRS Section 166(d)? However, the Government looks closely at your bad debts perhaps years later disallowing all your deductions in and IRS Bad Debt Audit. So if you loaned out some money or property that you want to deduct in 2015 as a bad debt, stay with us here on TaxView with Chris Moss CPA Tax Attorney to find out how to keep those bad debt deductions from being disallowed years later during and IRS Bad Debt Audit.

Bad Debts are not so bad when you get to write them off on your tax return. But what if you get audited as did Fred Cooper in Cooper v IRS US Tax Court (2015). The facts are simple: Cooper liked to make large sporadic loans to friends and business acquaintances. One of these loans was for almost $1M to Wolper Construction commencing in 2005 and due to be paid back in 2007. Wolper filed Chapter 11 in 2008 and eventually Chapter 7 in 2009. On advice of professional tax advisors Cooper amended his 2008 tax return in 2010 and deducted $750,000 bad debt deduction against ordinary income. The IRS audited years later in 2013 and disallowed the entire bad debt deduction for 2008. Cooper appealed to US Tax Court in Cooper vs IRS TC Memo 2015-191.

Judge Buch notes that Section 166 allows taxpayers to deduct any debt that becomes worthless within the taxable year. To be entitled to the deduction the taxpayer must show a bona fide debt based on a debtor-creditor relationship citing IRS Regulation 1.166-1(c). Business debts and nonbusiness debts are treated differently under Section 166. Nonbusiness debts are defined as debts not connected in connection with a trade or business. Unlike Business Bad Debts that are deducted directly against income, nonbusiness bad debts are short term capital losses with a maximum deduction of $3000 per year if there are no offsetting capital gains. Whether or not the debt is business or nonbusiness is a question of fact citing Rollins v Commissioner 276 F.2d 368 (4^th Cir 1960). The business bad debt must be “proximately related” to the conduct of the trade or business, citing Litwin v US 983 F.2d 997 (10^th Cir 1993).

Cooper argued before the Court that he was in the business of lending and therefore the deduction was a business bad debt. The Government argued otherwise citing that the facts do not support Cooper’s argument. The Court agreed with the IRS finding that there were five facts that showed Cooper was not a lender: 1. Cooper made only 12 loans over a six year period from 2005-2010. 2. Cooper only would lend money to friends and acquaintances. 3. Cooper did not use formal lending practices with no credit checks or collateral verification and there were no written promissory notes for 7 of the 12 loans. 4. Cooper did not publicly hold himself out to be a lender and 5. Cooper did not keep adequate contemporaneous business records. Many of the records given to the Court were constructed after the fact and were not considered credible.

The Court then went on to find that the nonbusiness bad debt was not wholly worthless in the year Cooper claimed the deduction in 2008. Cooper unfortunately was unable to show identifiable events to the Court that formed the basis of Cooper abandoning any hope of recovery citing Aston v Commissioner 109 US Tax Court 400 (1997). The facts unique to Cooper showed Cooper never claimed the debt to the US Bankruptcy Court, that Cooper listed the loan on his personal financial statement in 2009 as an asset, and that Cooper never sent Wolper a form 1099-C, cancellation of debt, nor was the IRS ever sent the 1096 form reporting the cancellation of the debt to Wolper. The Court therefore concluded that based on the facts, Cooper’s nonbusiness bad debt was not wholly worthless and therefore the deduction could not be sustained. IRS wins Cooper loses.

Our next case, Shaw v IRS US Tax Court (2013) also has simple facts. June Shaw had a large capital gain of over $1M in 2009 from the sale of an apartment building in 2008. In the same year as this gain, the facts show that in 2009 June Shaw loaned on a very short term basis over $800K to a company owned by her brother Kenneth Shaw. June Shaw was unable to get her loan paid back by her brother Kenneth in 2009 so she deducted this $800K as a capital loss bad debt against the $1M capital gain. The IRS audited years later and disallowed the entire bad debt deduction claiming there was no bona fide worthless bad debt to deduct. June Shaw appealed to US Tax Court in Shaw v IRS Tax Court 2013-170.
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Judge Lauber opines that Section 166(a)(1) allows a deduction for any bona fide debt that becomes worthless within the taxable year. A bona fide debt is a debt that arises from a debtor-creditor relationship based on a valid and enforceable obligation to pay a fixed sum of money, citing Section 1.166-1(c) of the IRS regulations. Transactions between family are subject to special extra scrutiny citing Caligiuri v Commissioner 549 F.2d 1155(8^th Cir 1977). The Court observed that June Shaw provided no evidence that she checked out the credit worthiness of the company nor that she request assets be given to collateralize the loan. The facts showed further that June Shaw extended an unsecured line of credit that no third party lender would have approved. Finally that Court noted that June Shaw made no serious effort to obtain repayment nor did she send a letter demanding payment. Finally she never filed a law suit against the company. The Court easily concluded that the loan was not a bona fide loan and therefore not deductible under Section 166. IRS Wins June Shaw loses.

So how can you best create the facts you need to deduct a bad debt and sustain the deduction under Section 166 during an IRS bad debt audit years later? First, before you lend anyone any money or property make sure you have a written legal promissory note with real terms of repayment. Check their credit scores and make sure you get collateral on the loan. Obtain financials and a PFS from the borrower, just like a bank would ask for. Second, if you think the debt is going bad, retain a collection company to collect the debt and consider bringing legal action. About a year later if all else fails, then and only then can you claim on a tax return that you are deducting a bona fide bad debt that is wholly worthless and noncollectable. Finally, have your tax attorney attest to the steps you have taken to collect the debt and insert her contemporaneous statement into your tax return before you file. You will be glad you protected your bad debt deduction from Government adverse action when the IRS come knocking on your door years later to commence an IRS Bad Debt Audit.

Thanks for joining us on TaxView with Chris Moss CPA Tax Attorney

See you next time on TaxView

Kindest regards

Chris Moss CPA Tax Attorney

Bad Debt Deduction, Business Bad Debt, IRS Bad Debt Audit, Nonbusiness Bad Debt

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