May 17

IRS Whistleblower

Welcome to TaxView with Chris Moss CPA

Do you know someone is defrauding the US Government by filing a false federal tax return? For example suppose you know about a group of perpetrators who are using identity theft to file hundreds of false tax returns and illegally collecting Millions of dollars of bogus refunds. Are you unconvinced or cynical that this could be happening? The fact is that Identity Theft has grown so lucrative that John Mica, (R Florida) says “Drug dealers are turning to IRS identity theft because it’s less risky and more lucrative”. Perhaps you might discover other tax crimes being committed by neighbors or co-workers hiding assets and taxable income offshore, or better yet not reporting income at all by simply not filing tax returns. Do you become a Whistleblower against these folks? But not so fast your wife says. She asks you to consider the safety and the protection of your family against retaliation before moving ahead with a Whistleblower claim? Good question right? So if you are you interested in finding out more about Whistleblowing, IRS style stay tuned to TaxView with Chris Moss CPA to get all the answers on IRS Whistleblowing, whether it is safe to participate for you and your family, and finally, at the end of the day does Whistleblowing really pay.

Just so you know the Government has had a Whistleblower Law on the books for over 100 years. The Secretary of the Treasury as early as 1867 was authorized to pay anyone for information leading to conviction of persons guilty of tax fraud. But it was not until 2006, through an enhanced Whistleblower program created in Section 7623 by the Health Care Act of 2006, that the US Tax Court was given jurisdiction to hear disputes between the Whistleblower and the IRS. Furthermore, it was not until about 2012 that taxpayer Whistleblowers started fighting back in US Tax Court to litigate adverse determinations of their awards. Fast-forward to 2015 and a review IRS Manual Part 25 Special Topics Chapter 2 Whistleblower Awards shows us a massive amount of very good and informative information on the Whistleblower program but no information on currently pending US Tax Court cases. But what about confidentiality and protection of your family?

Section 25.2.2.11 “Confidentiality of the Whistleblower”indeed claims that the Government will protect the identity of the Whistleblower as a “confidential informant” to the “fullest extent permitted by law”. But the Treasury Department in its own 2013 Report to Congress has doubts that there is sufficient protection. Specifically Treasury reports “…Unlike other laws that encourage Whistleblowers to report information to the Government, Section 7623 does not prohibit retaliation against the IRS Whistleblower…” Furthermore, if you decide to become a Whistleblower and you are an essential witness in a judicial proceeding it may not be possible to pursue the investigation or examination without revealing your identity.

Does the Whistleblower have any recourse if their claim is unreasonably rejected? If the Government will not move forward and pay you unless your reveal your identity, you can always petition the US Tax Court for a “Protective Order” to seal the record or in the alternative proceed anonymously while you dispute the Government’s position. In Whistleblower 14106 vs IRS, US Tax Court (2011), the Court sided with the Government on the dismissal of the claim, but Judge Thornton said that “Petitioner’s request to seal the record or proceed anonymously presents novel issues of balancing the public’s interest in open court proceedings against Petitioner’s privacy interests as a confidential informant. The Court noted that Section 7623 does not expressly address privacy interests of tax whistleblowers. But the US Tax Court has observed in US Tax Court 130 T.C. 586 that in appropriate cases the Court “might” permit a petitioner to proceed anonymously and might seal the record as well. The Court in Whistleblower 14106 did in fact under Section 7461(b)(1) and Rule 103(a) grant the Petitioner the right to proceed anonymously as a Whistleblower but denied the Petitioner the right to seal the record in order to preserve the case for the public’s ability to follow the proceeding, including I might add, my ability to insert the facts of the case into this article. Judge Thornton then ordered the parties to redact from the record all names and any identifying formation regarding the Petitioner. Taxpayer wins on anonymously proceeding and IRS Wins on dismissal.

Now that we know you can proceed anonymously if the IRS does not pay you, we now ask what it takes to win as a Whistleblower in US Tax Court. In other words at the end of the day if the IRS denies you compensation, what are your odds of getting paid by appealing to US Tax Court?
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First some statistics: According to the Tax Executives Institute in 2012 there were 8,634 Whistleblower cases filed, 128 awards granted totaling over $125M leading to taxes collected of over $592M—a 21% return for the lucky whistleblowers whose claims were accepted by the Government on the funds they all brought in to the US Treasury. But there were also 8,506 Whistleblower cases in 2012 which are either still pending, or were dismissed. At the same time, there has been a materially significant increase of US Tax Court Whistleblower cases that are being litigated. So let’s take a look at what is going on in US Tax Court on some of these pending cases.

In Kenneth William Kasper v IRS US Tax Court (2011), the IRS denied Kasper’s Whistleblower claim determining that the information Kasper provided did not meet the criteria for an award. Kasper appealed to US Tax Court in Kasper vs IRS US Tax Court (2011). The IRS moved for motion to dismiss for lack of jurisdiction claiming that Kasper did not appeal within the 30 day statute. Judge Haines sides with Pro Se Whistleblower Kasper holding that the 30-day period of Section 7623(b)(4) begins on the date of mailing or personal delivery of the adverse determination sent to his last known address. The IRS could not prove that such a mailing had been delivered so IRS loses, Kasper wins round one. The case is now hopefully proceeding to trial to eventually be decided on its merits.

So what does all this say about your chances of winning a Whistleblower award? Of all the 8634 of claims filed in 2012 only 128 were accepted. If you feel your claim has been unreasonably rejected you at least now have the right to proceed to US Tax Court. While there has been a large group of recent US Tax Court Whistleblower cases winning preliminary jurisdictional issues, including the right of Whistleblowers to remain anonymous, it remains to be seen whether or not these same Whistleblowers will eventually win in US Tax Court on the merits of their claims. Stay tuned to TaxView in 2016 with Chris Moss CPA when we will revisit the Whistleblower claims that are winding their way through US Tax Court to ultimately answer whether or not it pays to be an IRS Whistleblower. See you all next time on TaxView.

Kindest regards,

Chris Moss CPA

May 09

IRS Appeals Division

Welcome to TaxView with Chris Moss CPA

Many of you small business owners out there will at some point or another will be audited by the IRS. If your audit concludes with what you believe to be an incorrect application of the law to the facts in your specific case you should have the professional who prepared your tax return file a “protest” with the IRS Appeals Division. What is the IRS Appeals Division you ask? First and foremost IRS Appeals is not in the business of examining your tax return and reviewing for example the cancelled checks to support your expense deductions. The IRS Appeals Division rather is an elite group of experts, who ultimately report directly to the Commissioner. Appeals will very effectively and efficiently look at the results of your field examination audit and based on the “protest” prepared by your tax professional will make a determination as to whether or not the law was properly applied to the facts in your unique case . So if you have IRS examination tax liability stay with us here on TaxView with Chris Moss CPA to learn how to defend your business by skillfully applying the law to your unique facts before the IRS Appeals Division.

IRS promulgated Treasury regulation Section 601.106 provides and sets forth the entire framework for Appellate IRS practice. The IRS says all taxpayers have the “guaranteed right” to appeal as does the Taxpayer Bill of Rights but there is not an IRS Code Section that I can find that guarantees an absolute right to appeal. In fact, as underscored in the Estate of Weiss v IRS 90 Tax Court 566 (2005), while 26 U.S. Code § 7123 Appeals dispute resolution requires the Secretary to prescribe procedures by which any taxpayer may request early referral to the Office of Appeals, Federal law does not guarantee the taxpayer’s right to appeal as it does so with the taxpayer’s right to appeal to the US Tax Court. See Nina Olson testimony before the House Ways and Means and Joint Committee on Taxation May 19, 2005.

So if the Appeals process is not a guaranteed right, what exactly is Appeals? In my experience, appellate procedure within the IRS can be a positive cordial experience that ultimately saves both the Government and the taxpayer time and money. While the appeals process initially follows a somewhat structured path, there is invariably very informal discussions between your tax attorney, the examination division and ultimately the appeals officer.

You also now have the choice of a Fast Track Settlement by filing Form 14017 along with your written statement to your IRS appeals office detailing your position in writing on disputed issues. You may want to consider Fast Track for a quick easy compromised resolution if your facts are not contemporaneous and your intent years earlier was not easily established by the facts at that time.

Why are contemporaneous facts so valuable in establishing intent to the Courts? Contemporaneous facts, not self-serving testimony given years later, are important in establishing your intent, opines Chief Judge Phillips, in Philhall Corp. v. United States, 546 F.2d 210, 215 (6th Cir. 1976). If whoever prepared your tax return did not include contemporaneous facts in the tax return itself then at least your tax professional who prepared your tax return has a chance to compromise your tax liability through Fast Track.

For those of you who have the contemporaneously established facts that can be applied to Federal law, then you might be better off if your Tax Attorney files a more formal Protest either prepared on Form 12203 or prepared in a US Tax Court Petition type format. For example let’s take a look at a typical audit examination where the IRS agent is focusing on your rather larger than normal “office expense” deductions.

Based on the patients’ sexual history, the dose will be given for the patients with fixation and numerous different issue. cheap professional viagra Having spares at your disposal at all times can be very helpful order cheap viagra http://twomeyautoworks.com/?attachment_id=272 to you. Counselors and psychotherapists help sans prescription viagra their clients in a plausible manner. Silagra also twomeyautoworks.com viagra 100 mg contains Sildenafil Citrate as the active constituent. During the examination phase taking place in 2015 of your 2011 Form 1065 partnership return the IRS agent disallowed all your office expense claiming that he found substantial capital assets in office expenses that should have been capitalized. Specifically he found you purchased 20 ink jet printers at $200 each for a total of $4,000. You told the agent you decided to expense all capital purchases under $500 and record them in office expense, but both the agent his group manager declined to concede to you the deduction. All parties agreed the case was ripe for Appeal.

On Appeal your tax attorney argued that Federal law enacted in 2011 allowed for uniform expensing of capital assets for amounts that are less than $500. The Appeals Officer asked if you could establish this fact contemporaneously from 2011 records and did the law in effect at that time support your tax position taken on your tax return? As it turns out you were advised by your tax attorney in 2011 to contemporaneously include in your tax return an explanation of your $500 policy. Your tax attorney said to the Appeals Officer that such a $500 policy was created as a legal and reasonable tax strategy in accordance with Temporary Regulation 1.263(a)-2T(g). In fact, the Appeals Officer acknowledged that you had included this information in the Protest he received from you and that indeed you had a written policy in place as per disclosure in your 2011 tax return that all capital expenses less than $500 would be expensed as office expense. The Appeals Officer then noted that the temporary regulation in effect in 2011 were eventually made permanent by the IRS as fully detailed in Internal Revenue Bulletin 2013-43 issued October 21, 2013. The Appeals Officer looked one more time at your extemporaneous facts as applied to the law in your Protest and agreed that your tax position was justified, legal and reasonable. He recommended to the Commissioner that the Government concede this issue and that the examination agent’s report be adjusted with no tax due. You win, IRS losses.

So what does all this mean for you? First, always include extemporaneous evidence or “facts” to support your tax positions in your tax return prior to filing. Second, make sure your tax return preparer stands by her work and agrees in writing to represent you before the IRS all the way up at least the Appeals level to fight and defend the positions she took on your tax return. Finally, if and when there is ever an IRS audit coming your way, make sure your professional tax team has credentials and expertise to battle back and defend against the IRS adverse examination adjustments by either filing for Fast Track or submitting a formal Protest to Appeals. Remember, if you have the facts and law on your side an IRS Appeal may be just what your Tax Attorney ordered for safety and tax free living for many years to come.

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

See you next time, on TaxView

Kindest regards,

Chris Moss CPA

May 01

Related Party 1031 Tax Free Exchange

Welcome to TaxView with Chris Moss CPA

If you all are entering or coming out of a 1031 tax free exchange this year, whether it be forward or reverse, you may want to consider selling your relinquished investment property or purchasing your replacement investment property from a trusted member of your family. Sounds good right? But not so fast. There are two very dangerous IRS traps out there for your Related Party 1031 Tax Free Exchange. So stay with us on TaxView with Chris Moss CPA to make sure your Related Party 1031 Tax Free Exchange is fully protected and your tax return is bullet proof from adverse IRS audit action which could save you big tax bills many years later after the return is filed.

Before we get to IRS traps ahead, let’s review how the Government defines a related party as it would relate to your planned 1031 tax free exchange. IRS Code Section 1031(f) via IRS Section 267(b) or 707(b)(1) defines related party as your spouse, child, grandchild, parent, grandparent, brother, sister, or a related business, trust, or estate. A business related party could be an individual who owns 50% or more of a business, or two corporations which are members of the same controlled group. There are many more specific business related parties in Section 267(b) and also partnership related parties in Section 707(b)(1).

Once you determine you have a related party as part of your 1031 tax free exchange here is an easy IRS trap to watch out for and avoid: If the related party sells or disposes your relinquished property within 2 years or if you sell or dispose of the replacement property within 2 years then the whole gain is immediately taxable on the date of sale or disposition.

Setting off the 2 year 1031 related party trap results in very harsh penalties and interest on the back taxes you would owe. But if the sale or disposition, either for you, or your related party, had a principal purpose other than tax avoidance, the trap opens wide and you are free to leave. But imagine climbing out in victory of this trap only to get wacked with another hideous IRS trap. Indeed, as Ocmulgee in Ocmulgee Fields vs IRS US Tax Court (2009) found out, there is Section 1031 (f)(4), a catch all trap for anyone and everyone even those folks who escape the first IRS 2 year trap. So keep tuned to TaxView with Chris Moss CPA as we explore the Section 1031(f)(4) trap and see how to best avoid it.

Ocmulgee Fields, developed owned and managed real estate in Georgia since 1973. Owners were Charles Jones, his sons Dwight and Jefferson, and Jones Family Partnership, which was owned 1/3 each by Charles, Dwight, and Jeff. In 2003 Ocmulgee sold the Wesleyan Station property, for $7,250,000. A CPA named Pippin with McNair McLemore Middlebrooks out of Macon suggested a 1031 tax free exchange. After considering at least 6 possible replacement properties Ocmulgee purchased a replacement property called the Barnes and Noble Corner, a recently developed shopping center, which Ocmulgee sold years earlier as raw land in 1996 to a “related company” owned by Dwight and Charles called Treaty Fields for $6,740,000.

Treaty Fields filed its Form 1065 partnership tax return for 2003 with a gain of $4,185,999. Ocmulgee filed its 2004 corporate return form 1120 prepared by CPA Pippin with no gain claiming a deferral of $6,122,736 gain disclosing under part II of Form 8824 that Treaty Fields was a related party. The IRS audited Ocmulgee for 2004 and sent them a bill for $2M and penalty for $400K claiming they failed to qualify for a tax free exchange under Section 1031 (f)(4) which says: This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection. Ocmulgee appealed to US Tax Court in Ocmulgee Fields v IRS US Tax Court (2009).

Ocmulgee argued that they had a legitimate business reason for working with a related party in that the purchase “reunited its ownership” with the larger shopping center that the land had become since 1996. Ocmulgee also claimed they listened to the advice of CPA Pippin. The IRS countered that this case was like Teruya vs IRS US Tax Court (2005) where the Court found the taxpayer failed to show that tax avoidance was not one of the principal purposes of the transaction.

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Applying this law to the facts, the Court notes that if Treaty Fields had received Wesleyan Station from petitioner in exchange for the Barnes & Noble Corner, Treaty Fields’s adjusted basis of $2,554,901 in the Barnes & Noble Corner would have shifted to Wesleyan Station (which, in petitioner’s hands, had a basis of only around $716,164). Because of that step-up in basis, Treaty Fields would have realized a gain on the sale of Wesleyan Station approximately $1.8 million less than Ocmulgee would have realized had it forgone an exchange with Treaty Fields and sold Wesleyan Station itself.

The US Congressional report refers to this as “basis shifting”. In effect, because of basis shifting, related persons are able to “cash out” of their investments in property having an inherent gain at relatively little or no tax cost. Also, in some cases, basis shifting allowed related persons to accelerate a loss on property that they ultimately retained. Congress concluded that “if a related party exchange is followed shortly thereafter by a disposition of the property, the related parties have, in effect, ‘cashed out’ of the investment, and the original exchange should not be accorded nonrecognition treatment. This policy is reflected in section 1031(f), as enacted in the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7601(a), 103 Stat. 2370.

Based on the facts in Ocmulgee, Judge Halperin concluded that “basis shifting” allows the Court in this case to infer that tax avoidance was the principal purpose of the 1031 exchange. While the Court conceded that it is not prepared as a matter of law to find that “basis shifting” precludes the absence of a principal purpose of tax avoidance in all cases, it in fact does show tax avoidance in the unique set of facts in Ocmulgee’s case; namely the immediate tax consequences resulting from the 1031 exchange with Treaty Fields included an approximate $1.8 million reduction in taxable gain. The tax savings are plain and Ocmulgee’s counter arguments were unconvincing or speculative. Therefore Ocmulgee has failed to convince the Court that tax avoidance was not a principal purpose of the 1031 tax free exchange. IRS wins. Ocmulgee loses.

What does this mean for you? If you are planning to Section 1031 tax free exchange with a related party, make certain the property that you sell does not sell again within the 2 year period. Likewise you cannot sell the property you purchase for 2 or more years. Even if you avoid the 2 year trap, make sure your tax attorney records the evidence of a non-tax avoidance purpose and inserts that evidence into the tax return being filed that is deferring the gain to avoid Section 1031(f)(4). If you can gather than facts contemporaneously and record them in your tax return you will be bullet proof from IRS attack. Finally, make sure there is no negative evidence of “basis shifting”. Remember you can be presumed to be avoiding tax if there is evidence of basis shifting regardless of the 2 year rule, so make certain the facts are in your favor, and fully recorded by your tax attorney in your tax return as you file. You will most likely be glad you did when the IRS comes knocking on your door. Thanks for joining Chris Moss CPA on Tax View.

See you next time on TaxView with Chris Moss CPA.

Kindest regards,

Chris Moss CPA

Mar 31

Tax Free 1031 Exchange Virgin Islands

Welcome to TaxView with Chris Moss CPA.

Did you know you can Section 1031 to the US Virgin Islands? Now wait just a minute you say. IRS Code Section 1031 allows us to defer income tax on gains of our investment property sales, perhaps in many cases, forever, but the relinquished property and the replacement property have to both be located in the United States. Are you sure of that? Just about 15 years ago the IRS issued private letter ruling (PLR) 200040017 pronouncing that the US Virgin Islands were indeed property “in the United States” for purposes of Section 1031 tax free exchange. But dangerous waters lie ahead for the rest of us because PLRs cannot be cited or relied upon as precedent during an IRS audit. Indeed how you structure and contemporaneously document your unique sale and purchase to the Virgin Islands may determine if you win or lose in US Tax Court perhaps many years after your tax return has been filed. So if you are interested in a US Virgin Islands Section 1031 Tax Free Exchange (USVI 1031) stay with us here on TaxView with Chris Moss CPA to learn about the exciting new developments in these unchartered tropical waters of the US Virgin Islands and Section 1031.

A recent 2013 US Joint Committee on Taxation report says that the United States purchased the US Virgin Islands from Denmark in 1917 and codified the tax code there in 1954 to “mirror” the IRS Code in the United States. While the report goes out of its way to define on page 253 the term “bona fide resident” regarding the US Virgin Islands, the Joint Committee never mentions Section 1031. The report also makes clear that the US Virgin Islands is not part of the United States by defining the United States as the 50 States and the District of Columbia.

So how do we structure a USVI 1031 when the Joint Committee in 2013 never bothers to mention a USVI 1031? In order to create a bullet proof tax strategy for your USVI 1031 we then have to somehow overcome the simple fact that the US Virgin Islands is not part of the United States. We start with the PLR issued in 2000 about a taxpayer who acquired a 6 unit commercial building in the US held in a State land trust with a bank acting as trustee. Four years later the property was sold through a USVI 1031 which in the 5th year became income producing. The IRS is asked to comment on whether or not these facts qualify for Section 1031 tax free deferral.

PLR 200040017 ascertains the conflict between Section 1031, Section 932 and specifically gets the message of Section 1031(h) that investment property outside the United States is not “like kind” under section 1031. Furthermore, the IRS also establishes that the law of Section 7701(a)(9) is clear: The United States “when used in a geographical sense” includes only the 50 states and the District of Columbia. However, the IRS further reasons, in my view rather brilliantly, in PLR 200040017 that the legislative history of 1031(h) shows Congress did not want to override or otherwise modify Section 932 involving the tax treatment of the US and Virgin Island residents, citing Omnibus Budget Reconciliation Act of 1989 Report 101-386 dated November 21, 1989. Further research would seem to support the IRS PLR 200040017. According to the Conference Committee Report, the House in their original bill said “Foreign real property is treated as not similar or related in service or use to US real property for purposes of Section 1031”. The Senate amendment to the House bill had no provision for foreign real Section 1031 property. So how did this play out in Conference you ask?

In Joint Conference the agreement between the Senate and the House, worked out perhaps behind closed doors included the following addition: “No inference is intended to override or otherwise modify Section 932 of the Code (involving the tax treatment of US and Virgin Islands residents)”. See Page 614 of the Omnibus Budget Reconciliation Act of 1989, Conference Report November 21, 1989. How this additional provision could have been inserted into the Conference report when neither the House Bill nor the Senate amendment contained any such statement can be best answered by then House Ways Means Chairman Dan Rostenkowski and Senate Finance Chairman Lloyd Bentsen.
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In conclusion, since there does not appear to be any case law yet established to support USVI 1031 tax strategy, before you can file an income tax return with a USVI 1031 tax deferral your tax attorney has to have some ruling or IRS regulation, other than the PLR 200040017 that allows her to structure a legal USVI 1031 and bullet proof the tax return from adverse IRS audit action. In my view IRS regulations 1.932.1 perhaps might be all we need to support a USVI 1031 that connects to the Omnibus Budget Reconciliation Act of 1989 cited in PLR 200040017. Deep within Regulation 1.932.1 you will find Section (g)(1)(i) which says that the United States generally will be treated as including the Virgin Islands. Furthermore, section (g)(1)(ii)(E) says that application of the rule also includes property exchanged for 1031 property. This regulation clearly says USVI 1031 is legal, even though Section 1031(h) says it’s not and the 2013 Joint Committee Taxation Report never mentions it.

So what does all this mean for anyone who wants a USVI 1031 to the US Virgin Islands? First, make sure your qualified intermediary (QI), who will control all your funds from start to finish, is a Certified Exchange Specialist and a member of the Federation of Exchange Accommodators (FEA). Conference your QI, tax attorney and real estate agent making sure they are all familiar with structuring a USVI 1031. Second ask your tax attorney for a written opinion as to the soundness of the USVI 1031 structure she is creating for you all. Make sure your tax attorney cites IRS regulation 1.932.1 as support for your USVI 1031 structure and inserts that documentation into your tax return before filing along with her tax opinion which becomes part of any tax return you file that defers tax under Section 1031. Finally, enjoy your visits to inspect your new investment property in the US Virgin Islands. Perhaps I will meet up with you over at Island View Guesthouse. In the meantime make sure you join us next time with Chris Moss CPA on TaxView when we discuss related party 1031 tax free exchange strategy.

Thank you for joining us on TaxView.

Kindest regards

Chris Moss CPA

Feb 12

Bona Fide Resident US Virgin Islands

Welcome to TaxView with Chris Moss CPA

Are you the adventuresome family that wants to make a lot of money and pay no tax? No this isn’t a scam or bogus advertisement, but a realistic assessment of US tax law focused on relocating your business to the Virgin Islands; Specifically the US Virgin Islands, (the Islands) about 40 miles east of Puerto Rico, a short flight from most East coast cities, comprising four main islands, St Thomas, St John, Saint Croix and Water Island, as well as dozens of smaller islands. If you are a bona fide resident (BFR) of U.S. Virgin Islands for the entire taxable year, under IRS Code Section 932 your income is 90% tax free. Perhaps you think this is too good to be true? Hang on to your rum and coke mon because not only is this true but you can also 1031 tax free exchange over to the islands via Section 932 even though Section 1031 says you can’t do that. But before you pack your family and head over to on ocean worthy yacht stay with us here on TaxView with Chris Moss CPA to see just how difficult the IRS makes their Island residence tax traps to trip up your trip before you ever leave town.

The question comes down to this: Are you a BFR of the US Virgin Islands? You say yes, the IRS says no as was the case in Huff v IRS US Tax Court (2010) (Huff 1). Huff lost a Motion to Dismiss in that case, but was back to Court in Huff v IRS US Tax Court (2012). (Huff 2). The facts in the case are simple: George Huff claimed to be a BFR of the Islands with his income excluded under Section 932(c)(4). Huff filed his 2002, 2003 and 2004 tax returns with the US Virgin Islands Bureau of Internal Revenue (BIR) claiming no tax owed. The IRS audited claiming that Huff was not a BFR and owed tax, over a quarter million dollars to more exact. Huff appealed to US Tax Court in Huff v IRS US Tax Court (2010).

Judge Jacobs points out in Huff 1 that Congress created a “mirror tax” (Mirror) system for the Islands in 1921. The Islands tax law had major changes in 1954 and 1986 Tax Reform Act, but the Mirror still remains intact. What allows you entry into the Mirror is your BFR status, but the term “Bona Fide Resident” is not defined by IRS Code Section 932. Nor is it given any definition by the Joint Committee on Taxation.

Just so you know, there have been what amounts to thesis like research in various law journals on what makes you a BFR. The IRS requires completion of Form 8898 which you file to let the Government know when you begin or end a BFR but gives you little guidance on exactly when you begin as a BFR. Due to the lack of definition of BFR, bogus Virgin Island tax shelters surfaced with the help of corrupt tax advisors in the early 21st century. The IRS issued Notice 2004-45 to attack these tax scams. In 2004 Congress added Section 937(a) providing for a minimum 183 day residency requirement which mirrors the US substantial presence test of 183 days as well. Final regulations were issued by the IRS in 2006 but little Court provided case law had been provided at that time to help taxpayers and their tax counsel in BFR determinations prior to filing tax returns.

Huff could not have agreed more. After his 2010 motion to dismiss was denied in Huff 1, he headed on back to Court again in Huff 2 and filed a motion to allow the Virgin Islands to intervene on his behalf. Judge Jacobs denied the motion and Huff appealed to the United States Court of Appeals for the 11th Circuit in Huff v Commissioner (11th Circuit) decided February 20, 2014. The 11th Circuit reversed Judge Jacobs and remanded the case back down to US Tax Court in what will most likely become Huff 3 with instructions to grant the Virgin Islands intervention status as an intervening party. As of this publication date, Huff 3 has yet to be decided on the merits. However, there is new case law which seems to predict a Huff victory over the IRS as we look at Appleton v IRS US Tax Court (2013).

Arthur Appleton claimed to be a BFR in 2002, 2003 and 2004 of the US Virgin Islands and filed his tax returns with the BIR in accordance with Section 932(c)(4). Appleton claimed tax free income through a Virgin Islands partnership under Section 932(c)(2). The IRS and BIR jointly audited Appleton and BIR made no adjustments but IRS said Appleton did not qualify for tax free treatment under Section 932 because under Notice 2004-45 he had participated in scam that lacked economic purpose. IRS assessed Appleton back tax of over a $1Million plus another $1Millon in penalty and interest, claiming Appleton was a nonfiler who should have filed his tax return in the United States. Appleton appealed to US Tax Court in Appleton v IRS US Tax Court (2013) claiming he did file tax returns as required to the BIR and the statute of limitations had indeed expired. Appleton furthermore filed a Motion for Summary Judgment claiming there was no genuine issue of any material fact in dispute.

Judge Jacobs still handling the Huff remand was assigned Appleton’s Motion for Summary Judgment. The Court points out that section 932(c)(2) directs bona fide residents of the Virgin Islands to file income tax returns with the Virgin Islands BIR and section 932(c)(4) exempts both U.S. source income and Virgin Islands source income from U.S. taxation if all of the requirements of section 932(c)(4) are met. Assuming for purposes of Summary Judgment that these requirements of 932(c)(4) were not met, then Appleton would fall back into the regular IRS income tax filing system that covers most all other American taxpayers. Appleton claimed that in the “Where to file” section in the 1040 instructions a footnote said: Permanent residents of the Virgin Islands should mail to: V.I. Bureau of Internal Revenue, 9601 Estate Thomas, Charlotte Amalie, St. Thomas, VI 00802 when filing their Form 1040 individual income tax returns. However the Government countered to Judge Jacobs that anyone with common sense would have known to file Form, 1040 with zeroes on it to the Philadelphia Service Center. The Court found the IRS arguments unpersuasive and ultimately granted Appleton’s Motion for Summary Judgment. Appleton wins, IRS loses.
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Considering the outcome in Appleton, you would think the IRS would have stopped litigating these statute of limitation cases. But if Appleton was not enough to stop the IRS then surely the Estate of Travis Sanders v IRS (2015) just decided last week in February of 2015, with the US Virgin Islands intervening, sent a strong signal to the IRS to reconsider its BFR strategy. The facts in Sanders are simple: In 2002 Sanders became a professional consultant for a company organized in the Islands which required Sanders to become a resident there. Sanders filed his 2002 2003 and 2004 income tax returns with BIR not the IRS. The IRS audited and claimed Sanders was not a BFR sending Sanders a bill for over $600,000 in back taxes claiming the statute of limitations had not run since no returns were ever filed with the IRS. The Estate of Sanders appealed to US Tax Court in Sanders v IRS US Tax Court (2015). Judge Kerrigan who frequently cites Appleton and Huff 2 clearly supports Sanders in what amounts- finally- to a case which actually gets around to defining the true meaning of residency in the US Virgin Islands.

Citing Sochurek v IRS 300 F.2d 34 (7th Circuit 1962), the Court looks towards 11 factors to determine your claimed residency. Applying Sochurek factors and arranging these factors in “groups” as the Court did in Vento v BIR 715 F.3d 455 (3rd Circuit 2013), the Court concludes that Sanders was in fact a bona fide resident of the Islands because he intended to remain indefinitely or at least for a substantial period, citing Vento v BIR 715 F.3d 455 (3rd Circuit 2013) . Sanders wins IRS loses.

What does this all mean for anyone interested in doing tax free business in the US Virgin Islands? First, regarding forward 1031 and reverse 1031 tax free investments in the Virgin Islands, tune in next week on TaxView with Chris Moss CPA when we explore in more detail your tax free 1031 roadmap to the US Virgin Islands. Second, while your tax attorney may want to wait and see what happens in Huff 3, in my view, Sanders, Sochurek and Vento are all your tax attorney needs to bullet proof your tax return before filing a Section 932 Form 1040 in 2015. Finally, regardless of what happens in Huff 3-whenever,if ever, that may be- your tax attorney will use Appleton, Sanders, Sochurek and Vento to defend your tax return positions in compliance with Section 932 from adverse IRS audit attack if the Government should happen to select your return for examination.

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

See you next time on TaxView with a 1031 tax free excursion to the Islands mon. Perhaps I will see you there soon?

Kindest regards,

Chris Moss CPA

Feb 07

Are Damage Awards Taxable?

Welcome to TaxView with Chris Moss CPA

For anyone who has tasted a victory in litigation and eventually receives a cash settlement there is one bitter fact: Your entire damage award is probably taxable, even the one-third portion that went to pay your attorney. To add insult to injury, attorney fees are not a guaranteed offset to your monetary award. How do you know whether your award is taxable or not? How can the settlement be structured so you can deduct attorney fees? IRS Code Section 104 says that damages are not taxable if for personal physical injury or physical sickness. The IRS 2011 Audit Guide based on the Small Business Job Protection Act of 1996 is also informative. But at the end of the day, your settlement agreement is going to determine whether or not the award is taxable. So if your litigation is about to settle for lump sum or long term payout commencing in 2015, please stay tuned to TaxView with Chris Moss CPA to see how your settlement agreement should be structured for maximum tax savings for you and your family.

Our first case, Stadnyk v IRS US Tax Court (2008) involves a damage award concerning a used car sale. Mr. and Mrs. Stadnyk bought a used car on December 11, 1996 for $1100 which broke down hours after the sale. Stadnyk failed to resolve the issue with Nicholasville Auto, so she stopped payment on her Bank One check. When Nicholasville Auto discovered that their check was no good, they filed a criminal complaint against Stadnyk. On February 23, 1997 a Fayette County Sheriff arrested Mrs. Stadnyk at her home, handcuffed, photographed and sent her to jail where she was undressed, searched, and forced to wear an orange jumpsuit. Stadnyk was eventually indicted for theft by deception in April of 1997 but the charges were subsequently dropped.

Stadnyk sued Nicholasville Auto and Bank One, alleging breach of fiduciary duty of care, fraudulent misrepresentation and malicious prosecution, abuse of process, false imprisonment and outrageous conduct. The parties mediated and settled for $49,000. Stadnyk received Form 1099-MISC from Bank One reporting the payment of the $49,000 settlement for the 2002 tax year. Stadnyk did not report the settlement proceeds on her 2002 tax return. The IRS audited and claimed the entire settlement was taxable. Stadnyk appealed to US Tax Court in Stadnyk v IRS US Tax Court (2008).

Judge Goeke found that under Kentucky law, a tort had been committed against Stadnyk, the first of a two-prong test required for nontaxable treatment of the award. But the second test, whether the injury created by the tort was physical was more problematic. Because the settlement agreement did not address the issue of whether or not there was physical injury the Court had to look at the facts and evidence presented by Stadnyk. Unfortunately, while Stadnyk endured emotional distress, mortification, humiliation, mental anguish, and damage to her reputation, according to her own testimony, she did not incur a “physical injury” requiring immediate or even longer term medical attention. IRS wins, Stadnyk loses.

Our next case, Simpson v IRS US Tax Court (2013), is about a physical injury in the work place damage award: The facts are simple: Simpson a long term employee of Sears Roebuck and was eventually promoted in October 2000 to run a large troubled store in Fairfield, California which required her to work 50-60 hours a week in addition to her 3 hour daily commute. She also had to engage in strenuous physical activity including receiving unpacking and stocking merchandise. She incurred injury to her shoulders, knees and neck, became exhausted, lost weight and considered suicide. Simpson approached Sears’s human resource manager in 2002 and asked for a transfer to another position. However this request was never communicated to anyone within Sears. Simpson was eventually terminated.

Simpson retained attorney David Anton to file an employment discrimination suit on the basis of gender, age, and harassment. Sears settled in 2009 and paid Simpson $12,000 for lost wages, $98,000 for emotional distress and physical disability and $152,000 to Simpson for attorney fees. In the settlement agreement, Anton attributed 10% to 20% of the $98,000 to work related physical illness. Simpson never filed a workers’ comp claim and Sears never submitted the settlement agreement to the California Workers Comp Appeals Board for approval. Simpson reported $152,000 of the settlement and then netted out $152,000 of attorney fees on her 2009 Form 1040 which had been prepared by H&R Block. The IRS audited and claimed the entire settlement was taxable and disallowed all the attorney fees. Simpson appealed to US Tax Court in Simpson v IRS US Tax Court (2013).
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Judge Laro looked at State law and the wording of the settlement agreement, applying the facts of the case to guide the Court as to whether the award was taxable or not. The Settlement agreement was not detailed enough to help the Court. However, the Court found both Simpson and Anton to be credible witnesses. They testified that the award was settlement for Simpson’s work-related physical injury and sickness which would have been excluded from taxation under Section 104(a)(1) and regulations 1.104-1(b). But the IRS countered that Simpson failed to submit the award for approval to the California Workers Comp Board as required by California state law. The Court ultimately ruled to give both the IRS and Simpson a partial victory: In a victory for the IRS, the Court decided that only 10% of the settlement payment of $98,000 was not taxable. However in a victory for Simpson, attorney fees of $152,000 were deductible against $152,000 of taxable settlement under Section 62(a)(20). IRS and Simpson both win in a compromise decision.

What does this mean for anyone out there about to settle litigation for damages? First, your settlement agreement must be specific enough to describe exactly why you are receiving your award. Each of you will have a different unique set of facts that should detailed in the settlement agreement, If the Courts cannot use the settlement agreement to understand whether the injury was physical or not, then the Court will look to the facts and circumstances of your law suit as well as interpret State law for further clarification. Second, make sure your litigation attorney conferences with your tax attorney at the time the law suit is filed, during litigation and finally upon settlement of the case so your award if at all possible could be structured tax free with your attorney fees tax deductible. Finally, have your tax attorney include in your tax return a written opinion as to why the award is not subject to taxation. During an IRS audit years later you will be glad you did.

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

See you next time on TaxView

Kindest regards

Chris Moss CPA

Feb 01

1031 Exchange-Sale or Investment

Welcome to TaxView with Chris Moss CPA.

Are you receiving tax free deferrals from 1031 exchanges? If your 1031 exchange gets audited by the Government the first question the IRS auditor will most likely ask you is–Do you hold your real estate for sale or do you hold your real estate for investment? How you answer this question and what evidence you have to support your answer may determine whether you win or lose the audit and whether your transfers will be taxable or tax free. Indeed, if you hold the property for investment you win but if you hold the property for sale you lose. So if you are involved in 1031 real estate exchanges, either forward, reverse or leaseback, and want to protect the tax free deferral of your gains, stay tuned to TaxView with Chris Moss CPA to learn how to structure your 1031 deals so can provide the evidence to the IRS you need to prove you own your real estate for investment and not for sale.

So what does “held for investment” (HFI) mean and how can you create the facts and evidence in your 1031 tax free exchanges to support the HFI best practice evidence needed to win an IRS HFI audit? Moreover, the definition of what constitutes HFI property is not easily found and neither the IRS Code nor the regulations define HFI. Neal Baker found out the hard way in Neal Baker v IRS US Tax Court (1998).

The facts were simple: Neal Baker Enterprises was a construction company incorporated in 1957 in California by Neal Baker. The company restructured in 1969 to acquire real estate for investment and development. In 1989 Baker sold some of the land that had been developed and reported on its corporate tax return 1120 a deferred nontaxable gain of $428,806 under Section 1031. The IRS audited and disallowed the tax free deferral claiming that the exchange did not qualify as a nontaxable exchange under Section 1031(a) because the real estate was primarily for sale and not HFI. Baker appealed to US Tax Court in Baker v IRS US Tax Court (1998) arguing that their original intent was to construct rental apartment units on the property in question and to hold to units for long term investment.

Judge Wright notes that the plan that Baker submitted to the County called for subdivision of the property into 48 lots for the construction of single family residential homes and would not have allowed for multi-family residential zoning. Baker claimed his intent changed years after the plans were submitted to the County. The Court agreed that “intent is subject to change” but only if there is written evidence, citing Cottle v IRS US Tax Court (1987).

The Court saw “no evidence of actions by Baker’s Board of Directors to corroborate Baker’s statement that he was no longer subdividing land.” The Court finds that Baker’s mere statements that his company intended to discontinue the development business are not enough to change the characterization of the Exchange Property, citing Tollis v IRS US Tax Court (1993). Indeed on each of its tax returns from years 1982-1991 Baker chose “real estate subdivider and developer” as its principal business activity on business tax form Form 1120 even though he could have chosen “real estate operator and lessor of buildings”. To make matters worse for Baker, the Government argued that Baker’s accounting records had recorded the Exchange Property as a fixed asset under “construction in progress”. Baker countered that the accountants were in error, but regrettably for Baker, the accountants never testified in court to explain, verify, or discuss why the real estate was classified incorrectly. IRS wins Baker Loses

What if you have a mix of HFI and for sale property as did Larry and Cynthia Beeler in Beeler v IRS US Tax Court (1997). The facts are relatively simple: the Beeler’s lived in Port Richey Florida and owned a mobile home park. In 1984 in order to expand their operations Beeler paid $766,000 for 76 acres of land next to the trailer park. Beeler also wanted to mine sand if they could obtain a County permit to do so. Beeler eventually obtained a mining permit in September of 1984 allowing them to extract 600,000 cubic yards of sand. But the application for the permit clearly stated that the primary purpose of the land purchase was to expand the mobile home park not to mine sand. Beeler claimed mining depletion deductions on their Schedule C on the personal 1040 tax returns from 1984 until the property was sold for $1.2 million in 1991 under Section 1031. On Beeler’s 1991 tax return the sale was reported on Form 4797 as a nontaxable transfer under Section 1031. The IRS audited and disallowed the Section 1031 tax free exchange claiming the sand was “property held for sale”. Beeler appealed to US Tax Court in Beeler v IRS US Tax Court (1997).
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Judge Colvin quickly finds that while Beeler did mine the sand, mining was not their primary business as evidenced from the written application filed for the mining permit back in 1984. The Government countered that sand is inventory, not real estate, that sand on the property was worth $569,000 at the time of the sale and that at least that portion of the $1.2 million sales price should be taxable gain. But the Court again found again for Beeler in that sand was never mentioned in the sales contract. Beeler wins, IRS Loses.

So how can you bulletproof your tax return from an IRS Section 1031 HFI audit trap? First, if you are active in Section 1031 tax free exchange of real estate, be warned that to win a HFI IRS audit, you must have “contemporaneous” written evidence that your property was HFI over the entire duration of the Section 1031 exchange period. Second, if you alternate from year to year from being a landlord to a builder of multifamily rental units, or a developer of land into single family buildable lots, you must have “contemporaneous” evidence from your Board and your tax attorney to prove your 1031 property was HFI and not held for sale. Finally, make sure each tax return filed during the 1031 exchange period contains written evidence in the return itself as to your HFI intentions. Years later during an IRS Section 1031 HFI audit you will be glad you did.

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

See you next time on TaxView.

Kindest regards

Chris Moss CPA

Jan 26

1031 Sale and Leaseback

Welcome to TaxView with Chris Moss CPA

Are you soon coming out of a Section 1031 tax free exchange with a large gain? Have you thought about a 1031 sale leaseback (SL) as an alternative to a straight purchase to close out your 1031 this year? Why use an SL? Long term SLs qualify for tax free nonrecognition under Section 1031 and § 1.1031(a)-1(c) of the regulations. For those savvy enough to structure a 1031 SL correctly you can improve cash flow, reduce your risk, and free up credit for additional leveraged real estate purchases, all within the safety of a tax deferred Section 1031 exchange. But the IRS is watching these 1031 SL deals closely. So if you are interested in an SL and have a material gain coming out of a 1031 exchange stay tuned to TaxView, with Chris Moss CPA to find out why the IRS is so concerned about SLs and find out how to bullet proof your tax return from big IRS tax liability if your 1031 SL should get audited.

Why is the Government so concerned about SLs? It’s not about your 1031 and it’s not about your real estate SL. In fact, it’s not about you at all. It’s about bogus equipment deals set up by what appears to be unprincipled at best and worst dishonest tax advisors as in CMA v IRS US Tax Court (2005). This 128 page US Tax Court Opinion introduces us to “lease strips” and/or “rent strips” in a mind boggling series of worthless equipment leasing transactions that the Court concluded were without any substance or business purpose other than to evade tax. IRS wins big CMA loses. Here are just a few more abusive equipment deals which might explain why the IRS is cynical: Santulli v IRS US Tax Court (1995), Heide v IRS US Tax Court (1998), John Hancock Life Insurance v IRS US Tax Court (2013), Nicole Rose Corp v IRS US Tax Court (2001) and Andantech LLC and Wells Fargo Finance vs IRS US Tax Court (2002).

As a result of these abusive equipment leasing cases, the Government regularly audits SLs and sadly looks closely at even the most honest of Section 1031 SL transactions. How can you protect your 1031 SL? Have your tax attorney review with you Frank Lyon Co v IRS, US Supreme Court 435 US 561 (1978) the gold standard of legitimate SL cases. The facts are simple: Worthen Bank and Trust of Little Rock Ark in 1967 was unable to build a headquarters on land it owned due to the Federal Reserve rule at the time that the investment could not be in excess of 40% of its capital and surplus. As a work around in 1968, a privately held company Lyon was approved by the Federal Reserve as an acceptable borrower and New York Life as the acceptable lender. Worthen would sell the building to Lyon for $7 Million as it was constructed and Worthen would lease the completed building back for 25 years from Lyon for a rent of $14 Million. Finally, Lyon, the borrower would pay approximately the same amount of $14 Million back to the lender New York Life.

Lyon deducted interest, depreciation and other legal expenses in connection with the purchase on its 1969 income tax return. The IRS audited and disallowed the deductions claiming that Lyon was not the real owner of the building and that the sale-and-leaseback arrangement was a sham. Lyon paid the tax, and then sued in Federal District Court in Arkansas with the Court finding for Lyon. The Government appealed to the 8th Circuit Court of Appeals which reversed the District Court and ruled in favor of the Government. Lyon appealed to the US Supreme Court on a writ of certiorari which the Court granted in Lyon v US 435 US 561 (1978).

Justice Blackmun who wrote the majority 7-2 Opinion for the Supreme Court in 1978 notes that despite the fact that Worthen had agreed to pay rent and that this rent equaled the amounts due from Lyon to New York Life, Lyon was nevertheless primarily liable on the mortgage with the obligation on the notes squarely on Lyon. Lyon furthermore exposed its very business well-being to this real and substantial risk. “The fact that favorable tax consequences were taken into account by Lyon on entering into the transaction is no reason for disallowing those consequences. We cannot ignore the reality that the tax laws affect the shape of nearly every business transaction.” Lyon wins IRS loses.
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Do you see the IRS trap? If you are coming out of a 1031 exchange make sure your tax attorney bullet proofs the sale leaseback so that your landlord—not you—has the risk of ownership. It is that simple. Everything else will fall into place with the right tax attorney and the right qualified intermediary. (QI)

What does this mean for us? First have your tax attorney, qualified intermediary, real estate agent and banker all telephone conference or better yet meet within the 180 day window with plenty of time to spare with the replacement property-the property you will be leasing back-identified within 45 days of the relinquished property sale if a forward exchange. For a reverse exchange please consult your trusted QI. Second, make sure your landlord, the party that will be leasing back to you bears all the risk of ownership. Third have your tax attorney write up the transaction for insertion into your tax return to bullet proof the lease payments deductions in year one and every year thereafter. Finally, perhaps purchase a new additional rental property with your line of credit that you never used on the 1031 SL deal. Keep in mind that cost segregation comes into play as a tax strategy for new construction. Your Section 1031 SL deal is now bullet proof from a stray audit that might just come your way soon. Happy 1031 to all and thank you for joining Chris Moss CPA on TaxView.

See you next time on TaxView,

Kindest regards,

Chris Moss CPA

Jan 16

IRS Disguised Sales Trap

Welcome to TaxView with Chris Moss CPA.

For any of you out there owning a partnership interest that restructures from an S Corp to an LLC or perhaps borrows funds and takes partnership or shareholder distributions, watch out for the IRS Disguised Sale Trap (DST). Or perhaps you own some land or stock with a very low or even negative basis and are told by tax advisors that you can borrow money on those assets without every having to pay back the loan tax free. Watch out for the IRS DST. What exactly is a DST? A DST is simply cash you received that the Government says is a taxable sale resulted from you selling your equipment, partnership interest, real estate or land that you claimed on your tax return was nontaxable proceeds from a loan. If you are snared by this trap you will be viewed by the IRS as if you sold your interest. When that happens be prepared to pay a large tax to the Government or be forced to appeal to the US Tax Court for relief. The US Tax Court will be looking for evidence unique to your case which when applied to the case law will support your position that your distribution was not a disguised sale. Just how to do this is where we are headed on TaxView with Chris Moss CPA. So stay with us here on TaxView to protect your partnership interest from IRS DST traps and save you taxes.

We are going to start with a very simple concept: If it’s too good to be true it isn’t, as was the case of United Circuits vs IRS US Tax Court (1995). Frank Schubert and Gary Jump owned United Circuits (United) a company that ensured that waste products from manufacturing were in compliance with EPA standards. United would purchase various equipment each year which would be depreciated in accordance with IRS regulations. Equitable Lomas Leasing contacted United offering an alternative one year leasing program from 1989 and 1990 with a $1 dollar buy out after one year allowing United to deduct all their depreciable equipment in one year. United deducted the entire one year lease expense on both years tax returns. The IRS audited and disallowed all deductions. United appealed to US Tax Court in United Circuits vs IRS US Tax Court (1995). If you saw this case as a DST in reverse you are right. The Court easily found for the IRS. IRS Wins United Loses.

Moving to a much more complex set of facts we move to Virginia Historic Tax Credit vs IRS US Tax Court (2009) in which an investment fund (the Fund) was issuing tax credits to investors. The IRS disallowed the allocations of tax credits and increased income of the partnership claiming that in fact these tax credit allocations were disguised sales to the investors. By the way, do you see the DST in this case? Was the sole reason for joining the partnership to obtain a tax credit? The Government is going to see this as a disguised sale of tax credits with the investors being nothing more than buyers.

The Fund appealed to US Tax Court in Virginia Historic Tax Credit v IRS US Tax Court (2009). The Court concludes based on all the evidence presented, including a detailed review of the operating agreements, the investors were not purchasers but investor partners who genuinely wanted to support historic rehabilitation. The Court looked closely at the executed multiple documents creating the partnerships signed by each investor. The partnerships operating agreements indicated the purpose of the partnership was to help rehabilitate historic property and to receive State tax credits in return. Investors who testified at trial all testified credibly and accurately. Finally Judge Kroupa points to Congressional intent to encourage State historic rehabilitation programs and supports individuals involved in these programs citing the National Historic Preservation Act (1966). Fund wins, IRS loses.

Be careful though. If it’s too good to be true it isn’t. In Superior Trading LLC v IRS, 728 F.3d 676 (7th Cir. 2013) dozens of complex partnerships were formed around noncollectable receivables and bogus promissory notes in attempt to create a tax shelter scheme that was too good to be true. 7th Circuit Chief Judge Easterbrook, Posner and Williams chides Superior Trading, noting a genuine partnership is a business jointly owned by two or more persons (or firms) and created for the purpose of earning money through business activities. If the only aim and effect are to beat taxes, the partnership is disregarded for tax purposes. Which is exactly what the Court did in ensnaring Superior in the DST. IRS wins, Superior Trading Loses.

Our final case, Gateway Hotel v IRS US Tax Court (2014), involves the former Statler and Lennox Hotels of St Louis Missouri which were being renovated by Gateway Hotel Partners (Gateway).

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The bridge loan was repaid in 2002 with proceeds from the transfer of MHTCs to various investors. Gateway filed Form 1065 for 2002 and did not reflect the distribution of MHTCs in any amount to WAHD nor did it report it had income from transfers of MHTCs to various investors. The IRS audited Gateway for 2002 and 2003 and determined that Gateway failed to report $18 million of income from its transfers or what the Government claimed were disguised sales of the MHTCs. Gateway filed an appeal with US Tax Court in Gateway Hotel v IRS US Tax Court (2014).

Judge Goeke notes under Section 1.707-3 rules are providing for identifying disguised sales based on the facts and circumstances of each case. Section 1.707-3(b)(2) specifically provides a non-exhaustive list of 10 factors to prove the existence of a disguised sale. The Court looked very closely at all parties operating agreements and reviewed all 10 factors, comparing each factor to the facts of the case. The Court found only 2 of the 10 factors supporting a disguised sale. Gateway wins, IRS loses.

What can all of us do with much less complex business facts and circumstances to avoid DSTs? First and most important have your tax attorney annually review with you all K-1 distributions from partnerships and proceeds from loans as they pertain to Section 1.707-3(b)(2). Make sure cash or property you receive are put through the 10 factor scrutiny for analysis by your tax attorney. Second review all your operating agreements and financing arrangements with your attorney. Amend agreements as necessary to make certain you are ready for any DSTs coming your way. As you can see in Gateway, Courts look very closely at operating agreements and apply them to Section 1.707-3(b)(2) to your unique tax facts. Finally, if you receive any distribution in cash from loans or partnerships be sure you receive a written tax opinion from your tax attorney that this money is a “nontaxable distribution” and not a disguised sale. Insert that written tax opinion in your tax return before your file. When you get DST audited years later you will be glad you did. Thanks for joining Chris Moss CPA on TaxView.

See you next time on TaxView

Kindest regards

Chris Moss CPA

Jan 08

501(c)(3) Private Foundation Basics

Welcome to TaxView with Chris Moss CPA

If you have given a large donation to an IRS designated 501(c)(3) public charity this year you all know that you get to itemize that contribution as a tax deduction on Schedule A of your Form 1040. But there is also another option: the charitable tax-exempt 501(c)(3) Family Private Foundation or PF. While the super-rich have always had PFs, Bill and Melinda Gates Foundation for example, many more American taxpayers are giving PFs a try. Your family gets significant control over the types of “grants” they make as well as substantial income and estate tax benefits. Not to mention a permanent legacy for your family for generations to come. But watch out: there are many IRS Government placed PF traps that can cause your PF to cost you more than its worth in penalty excise taxes. So if you have any interest in forming a Private Foundation, stay with us here on TaxView with Chris Moss CPA to learn the steps in properly operating a PF so that you stay clear of IRS imposed excise taxes during a routine PF audit.

The legislative history of the PF is to say the least fascinating. One of the first PFs in the early 20th century was the Rockefeller Foundation formed in 1913. Did the newly enacted income tax enacted that same year and the estate tax three years later in 1916 have anything to do with this? What do you think?

Over a 100 years and thousands of private foundations later Congress addressed the wide spread abuse of the tax exempt status of private foundations. A leading 7th Circuit case, Quarrie Charitable Fund v IRS, 603 F.2d 1274 (7th Cir US Court of Appeals 1979) and the House Ways and Means 2005 Report rewinds us back to the Tax Reform Act of 1969. The Act imposed PF excise taxes on self-dealing between the founding family and the PF and a small 2% tax on investment income. Even with these excise taxes, PFs continue to be extremely popular with many taxpayers and have evolved into Grant-Making Private Foundations (GPFs), Private Operating Foundations (POFs) and Exempt Private Operating Foundations (EPOFs’) which are relatively easy to set up and operate—that is as long as you know where the IRS traps are.

The first trap is easy to avoid, but apparently not to Todd v IRS US Tax Court (2002). In 1994 Todd formed the Todd Family Foundation and transferred 6,350 shares of Union Colony Bancorp to the PF. Todd took a $500,000 charity deduction on Schedule A of his 1994 Form 1040 using form 8283 Noncash Charitable Contributions as substantiation for the deduction. The IRS audited and disallowed all deductions including carryforwards to 1995-1997 arguing that there had been no qualified appraisal of the stock. Todd appealed to US Tax Court in Todd V IRS US Tax Court (2002). Judge Halpern easily finds for the Government citing IRS regulation 1.170A-13 that a qualified appraisal must be made no earlier than 60 days prior to the date of contribution, be prepared and signed by a qualified appraiser and must have been included in the tax return along with Form 8283. IRS Wins Todd Loses.

The next two traps of control and self-dealing are more complex as discussed by the IRS themselves in their article Developments in the Private Foundation Area (1990). Unlike public charities, PFs are most likely controlled by the founding family, as in Bell v IRS US Tax Court (2009). Bell owned the Bell Family Foundation and numerous other profitable business entities. Bell contributed stock in Northeast Investors Trust to the Bell Foundation and properly deducted a charitable deduction with a signed appraisal on his 1996 tax return. There were in addition subsequent charitable carryforwards to years 1997-2000. The IRS audited and disallowed all Bell’s donations to the Bell Foundation for all years claiming that Bell still controlled the stock because Bell controlled the Foundation. Since Bell still controlled the stock there was never a charitable donation to deduct because no charitable gift had ever been transferred. The Bells appealed to US Tax Court in Bell v IRS US Tax Court (2009). The Court noted that although the PF is controlled by the Bells, control alone is not sufficient to defeat the charity deduction by the Bells. Judge Wells further argues that the IRS had not cited any authority in support of their contention that merely having control over the foundation disqualifies the Bells from claiming the charitable contribution deductions for the contribution of the shares of Northeast Investors Trust to the Foundation. Indeed the Court opines, the “Self-dealing” trap is more likely to trip up PFs as per IRS Code Section 4940 through Section 4945. IRS loses, Bell Wins.

Its ability to boost energy levels has even led to it being hailed as the new get viagra no prescription . Chemical concentration in the deeprootsmag.org buy levitra online body regulated by kidneys at all times will suffer severe balance disorder. With the naturally windy weather conditions of your UK, the nation will be able to harness the blowing wind and also meet up with levitra generika go to the web-site the power needs correctly. Yes, levitra 5mg here the only possible cure is tablets. Which brings us to the trap of self-dealing. “Self-dealing’ includes the furnishing of goods, services or facilities between a PF and a disqualified person as per Section 4941(d)(1)(C). There is one exception: Section 4941(d)(2)(E) allows “self-dealing” to family members if their service was of a professional nature and their compensation was not excessive. But what about for example a janitorial service?

In Madden v IRS US Tax Court (1997), Madden’s PF, the Museum of Outdoor Arts contracted with Madden’s Maintenance Company to perform maintenance, janitorial and custodial work. The IRS audited six years’ worth of Madden’s tax returns from 1983-1989 and charged him self-dealing excise tax on all years. Madden appealed to US Tax Court in Madden v IRS US Tax Court (1997). Judge Fay reviews the legislative history involving the “personal service” exception of Section 4941(d)(2)(E) noting that in order to prevent PFs from being used by their Founders for personal gain, Congress established a set of arm’s length standards for dealings between the foundation and the Founder members or “disqualified individuals”. H. Rept. 91-413 (Part 1), at 21(1969). The Court notes that while the IRS regulations do not define the term “personal service” they offer several examples such as legal services, investment management services and general banking services. The Court therefore concluded that janitorial service was not “personal service” and that Madden was subject to the “self-dealing” excise tax under Section 4941(a)(1). IRS Wins Madden Loses.

So what can you do to set up your PF right now? First, choose what area you want to make a difference in the world. One family can change the world with the properly structured PF. Look at Water Missions and see how this one family is changing the world working through the power of the Holy Spirit to provide fresh water to nations in need. Next make sure to consult with your tax attorney. She can set up your PF, including State entity formation, IRS EIN number, application to the IRS for tax exemption Form 1023 and can act as your PF in house legal counsel as well. Third transfer assets to the Foundation either in cash, stock and/or real estate and begin the journey to create your legacy. As a secondary yet important benefit your transferred assets are removed from your taxable estate saving you and your family estate tax upon your passing. Last but not least is the annual income tax savings you receive as you deduct one very large charitable donation on Schedule A of your personal tax return. All said and done, not a bad way to change the world. Hope your PF goes well in 2015. Thanks for joining us on TaxView, with Chris Moss CPA.

See you next time on TaxView,

Kindest regards and Happy New Year 2015

Chris Moss CPA

Dec 26

Gambling Losses Gambling Winnings

Welcome to TaxView with Chris Moss CPA.

Back in the 60s if you wanted to “gamble” you went to Las Vegas. Then Atlantic City opened up shop in the 70s as did many State Lottery games. After President Reagan signed the Indian Gaming Regulatory Act (IGRA) you even had more choices in the 80s. More recently in the early 21st century internet gambling opened up for business. According to the American Gaming Association, Americans now gamble over $50 billion annually with no end in sight. With all these new gaming venues, more and more Americans are trying their luck at games of chance, and chances are good you will win, at least every so often. When you win be prepared to be issued by the Casino or State form W2-G and be prepared to pay income tax on those winnings. But I am betting you just might have gambling losses you can offset against your winnings. So if you have the good fortune to have substantial gambling winnings in 2014 or plan to in 2015, stay tuned to TaxView with Chris Moss CPA to learn how to properly document your gambling losses to save you taxes.

The Revenue Act of 1934, limited gambling losses to gambling winnings as per Code Section 165(d) to encourage, according to the House Committee Report on Prevention of Tax Avoidance, gamers to report their winnings. Fifty years later, the US Supreme Court carved out a “professional gambler” (PG) designation as a full time business trade in Groetzinger 480 US 23 (1987). Today you are either a Professional Gambler (PG) or like most of us a hobby gamer (HG). IRS regulations 31.3402-1 requires both types of gamers to be issued Form W2-Gs with tax withheld generally from winnings in excess of $5000. Seems easy enough? That what Las Vegas Hobby Gamer (HG) Francis Gagliardi thought back in the late 90s as evidenced in Gagliardi v IRS, US Tax Court (2008).

Gagliardi (HG) was audited by the IRS for 1999-2001 with the IRS disallowing most of his gambling losses as not adequately substantiated. Gagliardi appealed to US Tax Court in Gagliardi v IRS, US Tax Court (2008). The court noted that Gagliardi submitted bank statements, cash withdrawals at casinos, credit card statements, and gambling calendars showing most of Gagliardi’s gaming activity from 1999-2001 in addition to supplemental Players Club Card records issued by the Casino. Judge Vasquez heard credible testimony from Gagliardi’s tax preparer, Mr. Hunner, as well as Hunner’s presentation of cash flow and net worth analysis. The Court concluded that Gagliardi’s expenses were creditable. Gagliardi wins, IRS loses.

Ronald Lutz (HG) was not so lucky in Lutz v IRS, US Tax Court (2002). Lutz, like Gagliardi was an HG, and gambled for many years in Mississippi and Louisiana casinos. Lutz filed his 1996 tax return without reporting any gambling activity. The IRS audited Lutz and determined $91,000 of unreported gambling winnings based on 18 W-2G forms that had been filed by the Casinos. Lutz appealed to US Tax Court in Lutz v IRS US Tax Court (2002) claiming his losses offset his winnings. The Court found that Lutz did not keep good records like Gagliardi. Lutz did not take advantage of casino based tracking system records based on the use of a “Players’ Club Card” as did Gagliardi. While the Court noted that use of a Players Club Card is not in itself enough to substantiate gambling losses, citing Mayer v IRS US Tax Court 2000-295 (2000), the Players Club Card could be an important supplement to a daily gambling log as used in Gagliardi.

Judge Thornton also noted that Lutz failed to produce a net worth analysis like Gagliardi did. Furthermore, Lutz’s own testimony was not credible. Finally, the Government showed that Lutz had purchased new cars in 1996 and showed other increases in net worth that year, evidence that his winnings were greater than his losses. The Court then admonished Lutz noting he could have avoided losing by keeping daily records of his gambling activity and actively using the Casino issued Players Club Cards at least to supplement his own records. IRS Wins, Lutz loses.

Our next case involves Professional Gambler (PG) William Praytor who bet that Section 165(d) was broader in scope than the Courts had previously recognized. On Schedule C of his 1994-1996 tax returns Praytor deducted over $41K of expenses in addition to his gambling losses. The IRS audited those years and disallowed all those other losses because in accordance with Section 165(d) gambling losses are only allowed to the extent of gains.” Praytor (PG) appealed to US Tax Court in Praytor v IRS US Tax Court (2000). Judge Carluzzo, citing Offutt v IRS US Tax Court (1951) notes that Courts have disallowed all expenses in connection with gaming over and above winnings. Also citing Todisco v IRS 757 F.2d 1 (Ist Cir 1985), Kochevar v IRS US Tax Court (1995), Valenti v IRS, US Tax Court (1994) and Kozma v IRS US Tax Court (1986) clearly establishing that Congressional intent was to “force taxpayers to report their gambling winnings” as per House Report 704 73rd Congress (1934). IRS wins, Praytor loses. Bad luck and timing for Praytor, because by 2011 Offutt and all the above related cases were overturned by Mayo.

Mayo, a California PG filed his 2001 tax return with not only gaming wager losses but some additional expense in connection with his horse racing gambling business resulting in a business loss of $22,265 in excess of gambling winnings. Included in this loss was car and truck, meals and other routine office expense. The IRS audited Mayo and disallowed all excess loss in accordance with IRS Section 165(d). Mayo appealed to US Tax Court in Mayo v IRS US Tax Court (2011), citing US Supreme Court case Groetzinger 480 US 23 (1987) allowing for an interplay between Section 165(d) and Section 162(a). In a surprise ruling Judge Gale overruled the Offutt v IRS 1951 US Tax Court and similar lines of cases which held Section 165(d) does not provide for any loss over winnings, even if the loss was created by normal Section 162(a) expenses like auto, office rent, insurance and supplies. Judge Gale notes that the legislative history of Section 165(d) does not specifically address whether or not additional expenses are deductible to create a “loss” in excess of winnings, and therefore the Court held Offutt that will no longer be followed. Mayo wins big, IRS loses.

Our final case post Mayo just decided a few months ago is Lakhani v IRS US Tax Court (2014), a California CPA who turned professional gambler to offset his profitable accounting practice with gambling losses from California pari-mutuel wagering on horse races on his 2006-2009 tax returns. The IRS audited and disallowed all losses in excess of winnings. Lakhani appealed to US Tax Court in Lakhani v IRS US Tax Court (2014).

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Lakhani argued that in extracting “takeout” from betting pools, the race track managers were acting as his fiduciary similar to that of an employer collecting payroll taxes. Citing Mayo v IRS US Tax Court (2011), Lakhani asserted that his losses were not from gambling but were simply his pro rata share of the takeout and therefore not subject to the limitations of Section 165(d).

Unfortunately for Lakhani, who was acting Pro-Se, Judge Halperin raised the stakes in the game noting that in California “the takeout cannot add to the loss of the losing gambler.” A gamer loses the same $2 bet whether the takeout is 10%, 15% or 20% of the “handle”. Therefore Judge Halperin concluded the “takeout” does not qualify as Lakhani’s deductible nonwagering business expense, citing the same case Lakhani cited Mayo v IRS US Tax Court (2011). IRS had the winning hand, Lakhani folded.

So how should AGs and PGs plan their year-end 2014 tax strategy to save taxes? If you are just an AG and happen to win the big lottery jackpot, make sure you can prove all your losses to offset those winnings. First use the Casino Players Club Card to keep track of your gains and losses. Make sure your gains match up to your W-2G. Second keep your own extemporaneous daily logs including bank and credit card statements of winnings and losses so you can fully take advantage of Section 165(d) and save taxes on your winnings. If you are claiming total offset of gains and losses have your CPA work with your tax attorney to prepare a net worth and cash flow analysis for inclusion in your tax return. Finally, if you’re a PG review the Mayo ruling with your tax attorney. While not fully settled in all Circuits, based on the Government conceding in the 9th Circuit to Mayo in 2012, I would bet you have favorable odds to deduct normal Section 162(a) expenses for you PG business.

Merry Christmas to all and a Happy 2015 New Year from TaxView with Chris Moss CPA.

Thank you for joining us on TaxView,

See you all next year in 2015.

Kindest regards

Chris Moss CPA

Dec 20

Uncertain Tax Positions vs Attorney Client Privilege

Welcome to TaxView with Chris Moss CPA.

Uncertain Tax Positions (UTPs) are upon us this 2014 Christmas season and they are coming your way. What are UTPs? A UTP is a deduction or a “tax position” on your tax return that has a 50% chance or more of being disallowed by the Government during an IRS audit. So how do you determine if you have UTPs? The IRS website gives plenty of assistance to large corporations with their army of tax attorney staffers, but the smaller privately held business owners with assets just over $10 Million and audited financial statements are most likely going to discuss which UTPs must be disclosed with their in house or independent tax counsel. Are your communications with your tax attorney regarding UTPs still protected under the attorney client privilege? To find out how to comply with IRS 2014 UTP regulations without losing your attorney client privileges please stay tuned to TaxView with Chris Moss CPA to learn how to protect your confidential communications as you complete Form 1120 Schedule UTP for 2014.

The UTP was first created by the Financial Accounting Standards Board (FASB) in 2005 as a draft and officially adopted in 2006 by FIN 48, interpreting FASB Statement 109 Accounting for Uncertainty in Income Taxes. Starting in 2014 the Government now requires in accordance with IRS Regulations 1.6012-2(a)(4) and 2014 UTP Instructions the reporting of UTPs on Form 1120 Schedule UTP if your business has $10 Million or more in assets and your financial statements have been or will be audited by an independent CPA firm who has expressed an opinion in accordance with GAAP. Moreover, my view is that eventually, perhaps as early as 2017, the IRS will expand the UTP initiative to include S Corporations, Partnerships and even someday individuals.

So what is your next step after you identify all your UTPs? Once you list all your UTPs you then have to provide to the IRS a “concise description” of all your UTPs. Finally, you decide which of these UTPs have less than a 50% chance of being sustained during and IRS audit and then simply list these “concise descriptions” Form 1120 Schedule UTP for 2014 as part of your annual corporate income tax return filing. This is anything but simple.

Check out the IRS UTP Resource Page. From this page we can click to Uncertain Tax Positions Schedule UTP. Can you choose which of your UTPs will have less than a 50% chance or more than a 50% chance of being sustained in an audit? If you are still confused read on.

A more likely than not standard of 50% is called a legal burden of proof. In a criminal case as you all know the burden is “beyond a reasonable doubt” which approaches almost a 99% chance of success. However for a tax position to have more than a 50% chance of success, existing law must be first applied to your unique facts and evidence that support the preparation of your tax return. Once the law is applied the those facts, you must more likely than not be able to persuade the US Tax Court to sustain your UTP. How many business owners can chose which UTPs will be sustained by the US Tax Court under these conditions without the assistance of a tax attorney? Will UTP disclosures from you to your tax attorney be confidential, safe and privileged communications?

Which is to say, they are actually “penis erection” pills and not, what most of us would consider, “penis soft cialis mastercard enlargement” pills. But, in some incidence surgical viagra generika 100mg implants or electric penile stimulation is needed to achieve erection. Not preferable to take in order viagra combination with medicines having nitrates. In 10% of cholecystectomies generico viagra on line loved that performed, patients have chronic diarrhea. Doug Shulman, former IRS Commissioner in prepared 2010 remarks to the American Bar Association meeting in Toronto Canada said: “The final instructions make it clear that a taxpayer need only disclose information to her attorney sufficient to identify the issue and the relevant facts.” Heather Maloy, Large Business and International Division Deputy Commissioner wrote in 2011 to her staff that the IRS recognizes a “Policy of Restraint” regarding privileged communications and documents. Former IRS acting Commissioner from 2012-2013 Steven Miller commented in 2012 before the Tax Executives Institute that out of “4,000 concise descriptions filed prior to 2012 only 133 failed to satisfy the requirements…further notification will be sent to these taxpayers to ensure that future filings follow these instructions…we intend to let those taxpayers know their future returns will be reviewed.”

Just so you know, the common law attorney client privilege issues surrounding “burdens of proof” and the “concise description” required by UTP federal regulations have not yet been tested in Federal Courts because the UTP program is so new. Lack of UTPs case law notwithstanding, all business owners should be able to freely discuss with their tax attorney how and why UTPs and their concise descriptions in 2014 are going to be listed on Form 1120 Schedule UTP without losing the “attorney client privilege” that attaches to those discussions. My best predication is that the Government, despite IRS Policy of Restraint Announcement 2010-9, will someday argue as they did in Johnston v IRS US Tax Court (2002), that you waived the attorney client privilege if “you relied on the advice of counsel” to not only create the required concise descriptions, but to include or not include concise descriptions on 2014 Schedule UTP.

The Court in Johnston, citing Hearn v Ray, 68 F.R.D. 574 (E.D. Wash 1975), argues if you assert the privilege you might also lose the privilege if the assertion of attorney client privilege prevents the IRS access to the information needed for the Government to win their case against you. Really? Folks these “concise descriptions” are not just numbers from the accounting department, but they are rather short essay answers you give the Government under penalty of perjury. Would you not want your communications to your tax counsel regarding these “concise descriptions” to be privileged and confidential?

What does all this mean for us? First if your business balance sheet shows assets over $10 Million, and your financial statements were audited by an independent CPA firm in 2014, review your year-end UTPs with a tax expert as soon as possible to create a draft Form 1120 Schedule UTP. Make sure any notes of discussions you had with your tax attorney are marked Confidential Attorney Client Privilege protected communications. Second make sure you understand that whatever you say, text, email or voice mail to anyone who is not an attorney will absolutely not be privileged during an IRS audit of Schedule UTP, particularly with regard to your concise descriptions. Finally learn about your UTPS. The more you know about UTPs unique to your business the more likely you will preserve your attorney client privilege and bullet proof your tax return from adverse IRS audit consequences for many years to come. Thanks for joining us on TaxView with Chris Moss CPA.

See you all next time on TaxView.

Kindest regards and Merry Christmas to all.
Chris Moss CPA

Dec 18

Single Member LLC

Welcome to TaxView with Chris Moss CPA

If you are thinking about starting a small business, why not start with a Single Member LLC.? The most important reason to form a Single Member LLC or “Single” is simplicity. As a Single you file no separate tax return apart from your personal tax return Form 1040. The law says you are “disregarded” for tax purposes as a separate entity and therefore no separate tax return is required. A second reason to stay single is most if not all states now recognize LLC’s for asset protection. Even the IRS must now follow state law if you owe back payroll taxes as per Aquilino v United States 363 US 509 (1960). Sounds easy and a bit too good to be true, doesn’t it? Well it is not too good to be true but it is anything but easy because the IRS has set up various Single traps out there. If you should get trapped during the holiday audit season, you might have to pay tax to get yourself out of that trap.. So if you are thinking about becoming a Single or have already set one up, stay tuned on TaxView with Chris Moss CPA so you can learn how to save taxes by bullet proofing your Single from IRS holiday traps.

The IRS can tax a Single, but a Single is regulated by state law. If you or your Single get audited the IRS may try to convince you that you and your Single are one and the same, but as the Government found out in Suzanne Pierre v IRS US Tax Court (2009), that is not the case. The facts are simple: Pierre formed Pierre LLC under New York State Law defining a single member LLC as a separate legal entity from its owner. The IRS audited Pierre’s 2000 and 2001 gift tax return and concluded that the gift transfers of discounted membership interests to trusts were really disguised gifts of the assets in the LLC. Valued without the discounts the IRS assessed Pierre’s gift transfers for an additional gift tax of $11 Million. Pierre appealed to US Tax Court in Pierre v IRS US Tax Court (2009).

The IRS argued before Judge Wells that because Pierre LLC is a single member LLC it should be treated as a disregarded entity under the check the box regulations, IRS Regulation 301.7701-3, IRS Publication 3402, and Revenue Ruling 99-5. Therefore, Pierre’s membership transfers should also be disregarded, and be treated as if Pierre had transferred the assets directly to the trusts. Pierre on the other hand reasoned that New York State law, not IRS regulations control the nature of the property transferred from the LLC to the trusts. Pierre also maintained that under New York State law a membership interest in an LLC is personal property and consequently a member has no interest in the individual assets of the LLC, citing NY Limited Liability Company Law Section 601.

Agreeing with Pierre, Judge Wells concluded that only New York State law., not Federal law, could create a property right in the LLC’s underlying assets. For that reason, the discounts on the Single membership interests were valid. Moreover, with New York State law controlling, the gift tax liability was determined by the value of the discounted transferred membership interests. Pierre Wins IRS Loses. Also see LexisNexis 2009 Commentary.

Be aware, however, that the Government can lure you into a reverse Single trap if your structure lacks business purpose as it did with Robucci v IRS US Tax Court (2011). Robucci was a psychiatrist whose CPA converted him from a sole proprietorship to a two member LLC. Robucci owned 95% as the first member and a PC manager owned the remaining 5% as the second member. Additional corporations and entities were set up with the sole purpose of reducing self-employment tax. Indeed Robucci paid very little or no self-employment tax for 2002-2004. The IRS audited and reversed all of the Robucci entities to a single member LLC with Robucci as the Single owner. The IRS then held Robucci personally liable for tax and penalty of over $50,000 in 2002-2004. Robucci appealed to US Tax Court in Robucci v IRS US Tax Court (2011). The Court easily concluded all of Robucci’s business structure had no substantial purpose other than tax avoidance and was nothing more than a sham.. The Court “pierced the corporate veil” holding all of Robucci’s income was subject to self-employment tax under Section 1401.

Before you have sex, drink a glass of vino to unwind the tensions and continue reading for info levitra generic cialis anxiety. In Japan Ed Hardy improved his technique for doing Asian tattoo line uk viagra art. It viagra 100 mg is more commonly known as erectile dysfunction (ED). In a perfect world, a tablet of 25 order generic cialis mg. Our final case, Medical Practice Solutions (MPS) and Carolyn Britton Sole Member v IRS US Tax Court (2009) focuses on a former IRS Single trap with respect to payroll taxes: Carolyn Britton of Massachusetts formed MPS as a single member LLC. The LLC failed to pay employment tax for several periods in 2006. Notices of liens were sent both to Britton and MPS. Britton requested a hearing pursuant to Section 6330, Britton argued that she was not liable for the lien. It was only MPS her Single that was liable as the “employer”. The hearing did not go well for Britton so she appealed to the US Tax Court in Britton v IRS US Tax Court (2009). The Court citing Littriello v US, 484 F.3d 372 (6th Circuit Court of Appeals) upheld the regulations of a single-member LLC in the context of employment tax liabilities even though the IRS was in the process of changing the regulations to favor Britton. Unfortunately, Britton was a few months to early and the Court decided in favor of the Government. IRS Wins Britton Loses.

After September 1, 2009 however new IRS regulations 301.7701-2 were enacted. The new law treats a Single with payroll liability as if that payroll had been paid by a corporation, Therefore a Single owner is now shielded from payroll tax liability.. Both Single owner Britton, Littriello but probably not Robucci would have been protected from payroll tax liability under these new regulations provided their Single had a primary business purpose.

What does all this mean for you? Your Single now has just about absolute limited liability as long as you did not lack business purpose in setting up the Single. What to do now to avoid IRS traps? First, have your tax attorney create a special and unique operating agreement just for you explaining your Single business purpose and also detailing who would replace you if you should pass. Second, as a Single without a partner you may wish to create a Board of Advisors to meet once or twice a year to give you advice and inspiration as your grow your business. Finally, as we head towards the New Year be prepared for potential business opportunity to surface, Perhaps a tax free 1031 exchange before year end? Or perhaps a possible mergers or acquisition or a reverse 1031? May you prosper as a Single and a Merry Christmas from Chris Moss CPA on TaxView.

Thank you for joining us on TaxView

Kindest regards

Chris Moss CPA

Dec 15

Self-Employment Tax

Welcome to TaxView with Chris Moss CPA

Are you self-employed? Do you ever wonder how much of your earnings is subject to self-employment tax? (SET) If you are self-employed you should be paying the correct amount of social security but not be overpaying. Employees are subject to payroll withholding and W2 year-end reporting as per the W2 withholding laws enacted in 1943. But if you a small business owner who pays social security or what I call an SBOSS you are governed by IRS Section 1402(a). Based on 1402(a) the IRS would have you believe all your income is subject to SET. But the fact is that the kind of work you do each day will create facts and evidence that the Courts use to determine whether you pay more or less social security. So if you are an SBOSS, stay with us here on TaxView with Chris Moss CPA to learn how to save taxes by not overpaying your SET, but by paying the correct and fair amount of SET each year on your small business earnings.

So how does an SBOSS know how much SET to pay? For answers let’s start with a simple US Tax Court farming case, Bot v IRS U S Tax Court (2002) and appealed to the 8th Circuit in Bot v IRS 353 F.3d (2003). Bot was a farmer who reported much of their income earned from a cooperative association as farm rental income for 1994 and 1995 on IRS Form 4835, and Schedule D and paid no SET. The IRS audited and invoiced the Bot’s for social security reclassifying much of their income on to Schedule C Profit and Loss. Bot appealed to US Tax Court in Bot v IRS US Tax Court (2002).

The Court noted that all gross income derived by and SBOSS is subject to SET under Section 1402(a).The business must be transacted wither personally or through agents or employees as per IRS regulation 1.1402(a) and 1.1402(b).Judge Marvel compares the IRS argument that Bot was in a trade and business to Bot’s claim that his earnings was from investment income. Judge Marvel attempts to differentiate a trade or business from passive investment income and reasons that only from a review of all the facts can a decision be reached. The Court concludes after reviewing all the evidence presented from both the Government and Bot that the facts show that Bot was engaged during 1994 and 1995 in regular efforts to reap a profit from the sale of corn products and those “efforts” constituted a trade or business. IRS wins Bot loses.

Bot appealed to the 8th Circuit in Bot v IRS 353 F.3d (8th Circuit 2003). The problem with the Bot appeal is that in US Tax Court he claimed much of the income from the Government conservation reserve program was Schedule D capital gains. However on appeal Bot changed his legal argument claiming the income he earned was passive investment income similar to dividends. Bot had not recorded this income on Schedule B of his original tax return. Was this a smart legal move by Bot to change his legal theory from Schedule D to Schedule B on appeal? Perhaps not. Circuit Judge Hansen voting with the majority finds for the Government. IRS wins Bot loses, again.

For our next case, Morehouse v IRS US Tax Court (2013), we have somewhat similar facts as Bot, but with a very different outcome. Morehouse received payments from the US Department of Agriculture Conservation Reserve Program. Was Morehouse an SBOSS? Let’s look at the facts. Morehouse lived in Texas but owned farmland in South Dakota. Between 1997 and 2007 Morehouse visited the farm various times and personally purchased materials need to implement conservation plans. Morehouse hired Mr. Redlin to help comply with the US Government’s conservation reserve program and sought and received from the United States Department of Agriculture cost-sharing payments for the seeding and weeding activities on the property. Morehouse filed a 2006 and 2007 income tax return with a Schedule E reporting rental income but paid no SET. The IRS audited and classified Morehouse as an SBOSS owing SET reclassifying his income to Schedule C. Morehouse appealed to US Tax Court in Morehouse v IRS US Tax Court (2013). What do you think? Was Morehouse subject to SIT?

Judge Marvel in Morehouse as he did in Bot clearly supported the IRS position and found for the Government even though Morehouse testified credibly that his actual work was “De Minimis” and did not constitute farming. The Court nevertheless concluded that Morehouse was an active participant in the farming program citing Bot v IRS US Tax Court (2002) and Bot v IRS 353 F.3d 595 (8th Circuit 2003). IRS Wins Bot Loses.
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Morehouse appealed this decision to the United States Court of Appeals for the 8th Circuit. Wait for the surprise Court ruling. Oral arguments were held on June 11, of 2014 and the case was decided just two months ago in Morehouse vs IRS 8th Circuit Court of Appeals (2014). In an amazing total reversal of the US Tax Court and the 8th Circuit decision in Bot, Circuit Judge Beam concludes that land conservation payments made to non-farmers constitute rentals from real estate and are excluded from SET because private landowners participating in government funded land conservation does not change the fact that “the government is using their land for its own purposes”, citing 16 USC §3831, even though contrary to IRS Notice 2006-108. Beam and Judge Loken in a 2-1 vote remanded to the US Tax Court with instructions to enter judgment in favor of Morehouse. IRS loses, Morehouse wins.

Circuit Judge Gruender in his dissenting opinion disagreed with 8th Circuit majority. Judge Gruender felt that the 8th Circuit should follow the 6th Circuit interpretation of the law citing Wuebker v IRS 205 F.3d 897 (6th Circuit 2000) and IRS Notice 2006-108, Application of 2006-108, and IRS Bulletin 2006-2 and finally citing, you guessed it, Bot v IRS 353 F. 3d 595 (8th Cir) 2003. Judge Gruender would have us believe that payments to Morehouse were for work performed by Morehouse or his agent Redlin with continuity and regularity. Note that Wuebker who initially won in US Tax Court in Wuebker v IRS US Tax court (1998), and was reversed on appeal in Wuebker v IRS 205 F.3d 897 (6th Circuit 2000), hinged on Circuit Judge Gilman’s ruling that the Wuebkers’ maintenance obligations to the US Government were somehow continuous and regular. Were the Morehouse facts any different that Wuebker? Read the NGFA commentary (National Grain and Feed lobby group). What do you think? By the way, if you search the IRS website the Government still claims USDA Conservation Reserve Payments are subject to SET. Also see IRS Chief Counsel Memorandum (2003). Perhaps this issue is headed to the US Supreme Court?

What does all this mean if you are an SBOSS out there paying SIT? First, sit down with your tax attorney at the end of each year and record the facts and evidence to support whether or not you your employees or agents actively participated in a business on a regular basis. Are you receiving income from this business? Chances are you are an SBOSS subject to SIT. However, you may still be able to “carve out” some non-SIT income with this second step: Examine closely all the income you earn as an SBOSS. Do you receive some rent in addition to professional fees? Do you sublease some space to other businesses? Or perhaps you invest in the stock market and earn capital gains and dividends during office hours and you report that income as an SBOSS. Various other income streams may be exempt from SIT as well, depending on how you are structured and the facts as they occurred each year as an SBOSS. Finally get your tax professionals to go over with you each year what types of your unique taxable income may be exempt from SIT. Have your tax attorney memorialize in writing what she said to you and include that document in the tax return you are filing. If there is ever an IRS audit years later you would be glad you did.

Thank you for joining us on TaxView with Chris Moss CPA. See you next time on TaxView.

Kindest regards,
Chris Moss CPA

Dec 09

Retirement Loan Rollover Tax Traps

Welcome to TaxView with Chris Moss CPA

How many of you have had an IRA or 401K indirect or even a direct retirement rollover that triggered a tax and penalty from the IRS? Have any of you borrowed from retirement to pay it back within 60 days only to get a bill from the IRS?–even if you have complied fully with the IRS Code Section 408(d)(3)(A)(i)? Did your broker ever send you an incorrect form 1099R? When you call your tax attorney for help she tells you to wait for IRS form 5498 being sent by your broker? But unfortunately the IRS does not usually wait. And get this: even though the 1099R and 5498 are so related to each other that the Government combines 1099 and 5498 instructions into one document they are mailed months apart. The result? An IRS notice, bill and penalty. What can you do? If you are planning to either rollover a direct or indirect IRA or similar tax deferred retirement account or perhaps are thinking of borrowing against your retirement account in 2014 as a year-end tax strategy please stay with us on TaxView with Chris Moss CPA to learn how to avoid the latest Loan Rollover Tax Traps (LRTT) that the IRS has set up to trip you up into paying more taxes and penalty.

Most of us know the rollover or “roll” drill. It’s always better to do a direct rollover also referred to as a trustee to trustee transfer. But if you go the indirect rollover route the IRS gives you only one roll per year. Why would you ever do an indirect roll? Some of you roll to change brokerage firms and others indirect roll to borrow the money. This leads many of you including Alvan Bobrow to LRTT#1. Alvan Bobrow v IRS US Tax Court (2014). Alvan Bobrow is a tax attorney who maintained various IRA accounts at Fidelity as did his wife Elisa. Bobrow received various indirect distributions in 2008 and rolled them 61 days later. The IRS audited for 2008 and sprung LRTT trap #1. Bobrow’s tax return fell right in this first LRTT on the tax course claiming that it was Fidelity’s fault that Bobrow was one day late. The Court did not find Bobrow’s testimony credible.

Judge Nega citing Wood v IRS US Tax Court (1989) distinguishes Bobrow because Wood physically hand delivered stock certificates to Merrill Lynch within 60 days and Merrill Lynch had assured Wood that the roll of the stock into the IRA would be consummated as instructed. Unfortunately Merrill Lynch failed to record the transfer due to a bookkeeping error. The stock certificates were in fact were actually transferred four months later. The IRS audited and disallowed the entire transaction. Woods appealed to US Tax Court in Wood v IRS US Tax Court (1989). Judge Ruwe says it is well settled that where book entries are at variance with the facts, the decision must rest on the facts. Wood’s testimony was credible and Merrill declined to testify. On the other hand in Bobrow v IRS US Tax Court (2014) Bobrow never asked Fidelity to testify and Bobrow’s testimony did not provide the facts necessary to prove his case. Unfortunately Bobrow fell to LRTT #1: You cannot blame your brokerage firm unless you have absolute proof of why your roll failed to roll. IRS Wins, Bobrow Loses.

What about rolls from an estate? Jankelovits tripped that LRTT #2 in Jankelovits v IRS US Tax Court (2008). Jankelovits transferred funds from her deceased aunt’s IRA as beneficiary of her estate. Unfortunately LRTT #2 says you can’t do indirect rolls from an estate, but only trustee to trustee transfers citing IRS Code Section 408(d)(3)(C) and IRS Pub 590. While Jankelovits testified that he asked the bank for a “nontaxable” roll, Judge Gale points out that unlike in Wood v IRS US Tax Court (1989) Childs v IRS US Tax Court (1996) or Thompson v IRS US Tax Court (1996), none of the bank employees involved with Jankelovits either testified or admitted any wrong doing. With no witness testimony to support Jankelovits, this taxpayer tripped into LRTT#2: You must roll an estate for a nonspouse with a direct “trustee to trustee” roll or you get no roll at all. IRS wins, Jankelovits loses.

Our next to last roll of the day will drop us into LRTT#3: rolls must be from a pretax contribution and clearly noted as such to the destination broker. Bohner v IRS US Tax Court (2014). Bohner was a retired social security administration government worker. Bohner was given a chance in 2010 to catch up his retirement account for any period which he made no contributions while he was on salary. His maximum catch up was $17,832 to be paid to the Government plan called CSRS. Bohner borrowed from a friend and send the $17,842 on to CSRS with no explanation to CSRS as to the origin of these funds. Bohner then paid back the friend from a Fidelity IRA later that year with what I can only portray as a backward reverse indirect roll. Bohner did not report the roll as taxable in 2010 and did not explain his backward reverse indirect roll to the IRS on his tax return, even though he was issued by Fidelity a 1099R saying that the withdrawal of these funds was indeed taxable. The IRS audited and disallowed the roll.

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Our last roll will be to explore LRTT#4, namely that the entire amount of the roll received from the old IRA must be the same amount paid into the new IRA, or in other words, the funds you roll out must be the same funds you roll in as evidenced in Lemishow v IRS US Tax Court (1998). The facts are simple. Lemishow rolled his Keogh and IRA funds to purchase stock. Lemishow then rolled the stock into a new Smith Barney IRA account. Lemishow filed his 1993 tax return and did not report the roll as taxable. The IRS audited and disallowed the roll claiming all distributions from the Keogh and IRA were taxable. Lemishow appealed to US Tax Court in Lemishow v IRS US Tax Court (1998). Judge Tannewald points us to legislative history showing that rollovers facilitate portability of pensions and therefore must be the “same money or property” that came from the originating IRA to the destination IRA citing Employee Retirement Income Security Act of 1974. To have avoided LRTT#4 Lemishow should have rolled cash into Smith Barney then purchased stock from within the newly created IRA. IRS wins Lemishow loses.

How can all this help you save taxes, and more important avoid the LRTTs out there to trip your roll “over” the IRS tax cliff? First and foremost never use an indirect roll. Use trustee to trustee direct rolls. Second, if you absolutely have no other choice but to use an indirect roll have your tax attorney coordinate with your originating broker and your destination broker to make the 60 day window bullet proof. Third, make sure your 1099R is correct. If not, send it back to the broker and demand that it be amended even if it means you file an extension. While you’re on extension, wait for your 5498 and make sure that the form 5498 is correct as well. Finally, don’t file your tax return claiming tax free treatment of the roll until your tax attorney includes in your tax return his written transaction history documenting names and phone numbers of the broker witnesses on both sides of the roll. When you get audited by the IRS disallowing your roll you will have a bullet proof tax return ready to spring from the LRTTs that the Government has sprung and roll that distribution right back to the IRA tax free where it belongs. Thanks for joining Chris Moss CPA on TaxView.

See you next time on TaxView

Kindest regards
Chris Moss CPA