Tax Law and Business Organization Strategy : Texas Wind Energy Tax Lawyer & Attorney : Sprouse Shrader Smith Law Firm : Serving Amarillo and the Texas Panhandle

In a new private letter ruling, IRS continues to take the position that trusts materially participate in an activity for purposes of the Code Sec. 469 passive activity loss (PAL) rules only when their trustees participate in the operations of the activity on a regular, continuous, and substantial basis.

Query: Does this mean that you look at the participation of all of a corporate trustee's employees, but not the agent's of an individual trustee?
 

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The staff of the Joint Committee on Taxation has released a comprehensive study on the business tax changes included in the President's FY 2010 budget proposal, as submitted to Congress on May 7, 2009.  For a list of the proposed business tax changes, read on.

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Notice 2009-59 updates the IRS' list of “listed transactions” published in Notice 2004-67, 2004-2 CB 600, by adding four transactions designated as listed transactions after the 2004 notice was issued. Notice 2009-55 carries a list of transactions designated as “transactions of interest” for various disclosure and penalty purposes.

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The Tax Court held that the taxpayers' ownership interests in limited liability partnerships (LLPs) and limited liability companies (LLCs) are excepted from classification as “limited partnership interests” under the temporary regulations by operation of the general partner exception. Thus, they could use all seven tests for material participation in the temporary regulations, instead of only the three available for participation of individuals that are limited partners.

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The IRS has issued its annual data book, which provides statistical data on its 2008 fiscal year. The data book provides valuable information about how many tax returns IRS examines, and what categories of returns IRS is focusing its resources on, as well as data on other enforcement activities, such as collections. A total of 1,391,581 individual income tax returns were audited during FY 2008 (Oct. 1, 2007 through Sept. 30, 2008) out of a total of 137.8 million individual returns that were filed in the previous year. This works out to 1.0% of all individual returns filed (about the same as the audit rate for the preceding year).

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A recent report by the Joint Committee on Taxation included a list of expired and expiring tax provisions from 2008 through 2020. The report serves as a reminder that numerous key provisions — many of them only recently extended by the Emergency Economic Stabilization Act and the American Recovery and Reinvestment Act of 2009 — are currently slated to be on the books only through 2009, while others last only through 2010. While these provisions may ultimately be extended (and some of them surely will be), one, where possible, should take action now to prevent losing out on tax breaks.

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The Seventh Circuit reversed the Tax Court's holding that a closely held corporation could deduct only about $7 million of a $17 million CEO bonus based on a percentage of pretax net income. The appellate court's decision rejected the Tax Court's view that a repayment agreement in the event of IRS challenge was evidence that a dividend had been intended. It also rejected the Tax Court's methodology which concluded the CEO was overpaid relative to the compensation of CEOs of publicly held corporations in the same business. Menard, Inc. v Commissioner (CA 7 3/10/2009)

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In a Dec. 17 letter to Rep. George Miller (D-CA), Chairman of the House Committee on Education and Labor, a Treasury official has said that IRS will not relieve retirement plan account participants and IRA owners of the need to take required minimum distributions (RMDs) for 2008. The only relief these taxpayers can look forward to is the Pension Act's waiver of the requirement to take RMDs for 2009.

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The Congress passed this Act last Thursday, December 11, and the president is expected to sign it.

The Act should help give older Americans some much needed financial flexibility as they struggle to manage their finances during this difficult economic time. A key provision in the Act is designed to help alleviate the financial burden facing seniors who have seen their retirement savings shrink dramatically. The new provision provides relief to senior citizens by allowing them to continue to keep money in retirement accounts that they are typically required by law to withdraw once they reach age 70 1/2.

The Act also includes important provisions that ease funding requirements for employer-sponsored pension plans. Absent the new legislation, these plans would have been forced to make significantly increased contributions during the current financial crunch when they are very short on cash. The new law provides pension funding relief for both single-employer and multi-employer plans.

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In an April 22, 2008 News Release, the Texas Comptroller, Susan Combs, announced that businesses unable to meet the May 15 due date for the franchise tax will have an additional 30 days to submit revised franchise tax returns or request an extension without penalty. The Comptroller stated that her office recognizes that the complexity of the revised franchise tax, and the newness of the enhanced electronic reporting methods, have caused concern among tax practitioners and taxpayers throughout Texas. The extension will enable businesses to avoid the 5% penalty that would have been imposed if they had not filed by May 15.

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The IRS has issued Revenue Procedure 2008-16 (2008-10 IRB). The Revenue Procedure provides guidelines for limited personal uses that won't prevent a dwelling unit from qualifying as property held for trade or business or investment use under the Section 1031 like-kind exchange rules.

The IRS says it recognizes that many taxpayers hold dwelling units primarily for the production of current rental income, but also use the properties occasionally for personal purposes. “In the interest of sound tax administration,'' the IRS has provided taxpayers with a safe harbor under which a dwelling unit (real property improved with a house, apartment, condominium, or similar improvement that provides basic living accommodations including sleeping space, bathroom, and cooking facilities) will qualify as property held for productive use in a trade or business or for investment for Code Sec. 1031 purposes even though they occasionally use the dwelling unit for personal purposes.

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You wouldn't ordinarily think of the NYTimes as a hot source for new tax developments. But some recent actions by the IRS criminal division involve subjects that are high enough profile to warrant reporting by the NY Times.

First, there is the recent prosecution of Wesley Snipes, a well know actor. His case ended, for the most part, in a victory for Snipes. While he was found guilty of some misdemeanors, the jury apparently believed that he did not have the requisite criminal intent to be guilty of felony tax evasion. As noted in the article, it can be difficult to prove criminal intent where the accused has any reason whatsoever to justify his or her conduct.

Another case, with not quite a high a profile, involves what the NYTimes refers to as "penny-ante tax fraud." The case involves alleged "inflated appraisals" of property that was appraised at less than $5,000. Not exactly your normal "badge" of organized crime.

Makes you wonder if the IRS is spending its resources trying to turn civil tax cases into unwinnable criminal prosecutions.

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Beginning this year and continuing through at least 2010, a zero tax rate applies to most long-term capital gain and dividend income that would otherwise be taxed at the regular 15% rate and/or the regular 10% rate. The amount of income taxed at 0% depends on the interplay between an individual's filing status, his taxable income, and how much of that taxable income consists of long-term capital gain and dividends.
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The National Taxpayer Advocate has released its 2007 Annual Report to Congress in IR 2008-4. The Advocate highlights the issues raised by newly amended Code Sec. 6694, the return preparer's penalty, and how it may affect the way tax preparers dispense advice. The Report says that new standard may, in some cases, lead to conflicts of interest between preparers and their clients.
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On Nov. 15, Senate Finance Committee Chair Max Baucus (D-MT) and committee ranking minority member Chuck Grassley (R-IA) introduced legislation to prohibit the Patent and Trademark Office (PTO) from granting patents for common tax strategies and tax planning inventions. 

“America's patent system promotes innovation and competitiveness in all industries. However, the growing number of attorneys and accountants applying for patents of tax strategies and techniques is cause for concern,” Baucus said. “Taxpayers should not have to pay a toll charge or worry that they're violating patent law when they try to file their tax returns. Tax practitioners should be able to provide advice and services to their clients without paying a fee to the patent holder.”

Grassley added that tax patents “undermine the integrity and fairness of the federal tax system. They put taxpayers in the undesirable position of having to choose between paying more than legally required in taxes or paying a royalty to a third-party for use of a tax planning invention that reduces those taxes. Congress needs to level the playing field and improve options for taxpayers.”

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An Alabama District Court awarded nearly $180,000 in penalties and attorney's fees against a doctor who was also a plan administrator when the doctor did not provide requested plan documentation as required under ERISA. Cromer-Tyler v. Teitel, et. al., (2007, DC AL) 2007 WL 2684863. The doctor delayed delivering the requested documents for over 4-1/2 years.The court imposed a maximum penalty of $110 per day, or $179,960. The court also ordered the doctor to pay attorney's fees.

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It’s almost as if the IRS is trying to prove my recent personal commentary correct. In a recent action on decision (AOD 2007-004,10/01/2007), the IRS announced that it won't acquiesce in the Sixth Circuit's holding in U.S. v. Roxworthy, (2006, CA6) 98 AFTR 2d 2006-5964, 457 F3d 590. That case reversed a district court order enforcing an IRS summons on a corporate taxpayer's vice president for memoranda prepared by the company's outside audit/consulting firm. The Appeals Court found that the memoranda were prepared in anticipation of litigation and were protected by the work product doctrine. IRS disagreed with that conclusion and stated that a document prepared in anticipation of an audit is not prepared in anticipation of litigation.

This puts the IRS out of line, not only with the Sixth Circuit, but with a recent district court decision which rejected the IRS's request to examine “tax accrual workpapers.” In a case involving Textron, Inc. and its subsidiaries,  the found that the workpapers were privileged under the work product privilege (see U.S. v. Textron INC. and Subsidiaries, (DC RI 8/28/2007) 100 AFTR 2d 2007-5848. Since the IRS now says that it will not follow these decisions, even in the 6^th Circuit, one must hope that any taxpayer with the resources to fight the IRS over the privilege issue will be rewarded, not only with a victory, but with attorneys fees as well. Continue Reading...

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The Treasury this week issued proposed regulations that would add patented transactions to the list of reportable transactions. As noted in our July 20, 2007 post, Congress is moving towards making tax planning techniques unpatentable. While classifying a transaction as a reportable transaction does not make it incorrect or illegal, the fact that a taxpayer must report a transaction has a chilling effect on taxpayers entering into such transactions. After all, who wants to face the resources of the government to prove they have properly reported a transaction, no mater how defensible their reporting might be?

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Recent changes to the Jobs Tax Credit may allow many more employers to claim a tax credit for new hires, particularly in the Texas Panhandle and Tri-State area. Before the changes, the law provided a tax credit to employers who hired disadvantaged workers. The tax credit can be as much as $2,400 for each person hired.

The credit has been expanded to include a new category of eligible workers: individuals who are at least 18 year old, but less than 40 on the date of hire, and who reside in a county that lost population through the 1990s. The IRS has just identified those counties, and they include:

• Bailey, Briscoe, Castro, Collingsworth, Cottle, Deaf Smith, Floyd, Gray, Hall, Hemphill, Hockley, Hutchinson, Lamb, Oldham, Roberts, and Wheeler in Texas
• Harding and Quay in New Mexico
• Beaver, Cimmaron, Custer, Dewey, Ellis, Greer, Harper, Harmon, Kiowa, Roger Mills, and Woodward in Oklahoma.

A list of all counties meeting that definition can be found in the Instructions to IRS Form 8850. The new law becomes effective for hires made after May 25, 2007. 

The “catch” in the law is the requirement that employers must submit a certification request to their state workforce agency within 28 days of the date of hire using IRS Form 8850.

The employee does not actually have to be a “disadvantaged” person. They only have to reside in one of the listed counties at the time of hire and throughout the period they receive wages that qualify for the credit. In fact, highly paid or managerial employees who happen to reside in a listed county will qualify.

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Buried in legislation enacted last May are major changes to the rules imposed on return preparers. The law was passed without much possibility for discussion or input from tax practitioners or even the IRS. It came as a such a surprise to the IRS that the IRS delayed the effective date of the new standards and sanctions under Section 6694(a).

Some of the effects of these new rules are likely to be:

• conflicts arising from the fact that taxpayers need only meet a substantial-authority test on most tax positions, but preparers must meet a more-likely-than-not test that, if not met, requires a disclosure on the return.
• an increase in the fees of return preparers to cover the increased work necessitated by and the increased exposure to higher penalties.

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For all of you with IRA's at Vanguard, please immediately see the article published by Forbes.com entitled "Disinherited by Vanguard" .  This article discusses the notice Vanguard has sent you regarding their new policy to combine IRA beneficiary desginations if you have more than one IRA at their company.  This new policy could have dramatic unintended consequences if you are not aware of your new beneficiary designation.  Although you will need to subscribe to this website (if you have not already done so), it is a free and immediate subscription.

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The Service recently ruled (PLR 200728008) that Section 1031(f) will not trigger gain recognition in an otherwise qualifying like-kind exchange when the taxpayer transfers relinquished property (through a qualified intermediary (QI)) to a related person and acquires replacement property (through a QI) from an unrelated person, even if the related person disposes of the relinquished property within two years of its acquisition of such property.

This is the third time the Service has issued a letter ruling that addressed whether Section 1031(f)(4) applies when a taxpayer transfers relinquished property (through a QI) to a related person and the related person disposes of the relinquished property within two years. (See PLR. 200709036 and PLR 200712013). These three letter rulings may encouragte taxpayers looking to structure transactions with similar facts.

Taxpayers should remain cautious, however, in considering whether a related party's participation in a like-kind exchange will implicate Section 1031(f). The related party's purpose for acquiring the property may  determine whether the transaction qualifies for tax deferal. That is, if the related party acquired the property to subdivide it or construct improvements before selling (to preserve nondealer status for the exchanging taxpayer), or to list the property for sale immediately (seeking to extend the 180-day parking period permitted under Rev. Proc. 2000-37), the Service might not reach a similar conclusion.

Taxpayers should also be aware that this PLR should not be confused with the fact situation of earlier unfavorable rulings where the taxpayer acquired replacement property (through a QI) from a related person. Specifically, in Rev. Rul. 2002-83, 2002-2 CB 927, the Service concluded that a taxpayer transferring relinquished property (through a QI) to an unrelated person in exchange for replacement property (through a QI) owned by a related person must recognize gain if the related person receives cash or non-like-kind property. The Tax Court reached a similar conclusion in Teruya Brothers Ltd., 124 TC 45 (2005).

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In what is probably another case of "bad facts make bad law," a Florda District Court allowed the IRS to proceed to the merits in a "Son of BOSS" case, despite the IRS' making it's assessment against the taxpayer more than 3 years after the taxpayer filed a return.  Brandon Ridge Partners v. U.S., (CA Fl 7/30/2007) 100 AFTR 2d ¶2007-5107.

The case contradicts two recent decisions, one in the Federal Claims Court (Grapevine Imports Ltd. v. U.S., (Ct. Fed. Cl., 7/17/2007) 100 AFTR 2d ¶2007-5065) and the other in the Tax Court (Bakersfield Energy Partners, LP, (6/14/2007) 128 TC No. 17. Both of these recent cases relied on the Supreme Court's decision in Colony Inc v. Com., (1958, S Ct) 1 AFTR 2d 1894 , 357 US 28. In Colony the Supreme Court held that the 6-year statute does not apply unless there has been an omission of an item of gross income, not simply the overstatement of basis or cost of the item sold. Under that reasoning, if you report the gross amount of the sales proceeds from each sale, there can be no omission of gross income, which is necessary for the 6-year statute to apply.

The District Court's reasoning in Brandon RIdge seems quite strained, probably because it takes a maze-like path to find a distinction from the prior decisions that is no more than the size of a pin hole if the distinction exists at all. Not only does it hold, contrary to the Supreme Court, Tax Court, and Court of Claims, that the reporting of an improper amount of gain amounts to an omission of gross income, but it also holds that reporting of the gross amount of the sales proceeds is not sufficient to adquately apprise the IRS that an omission of gross income has occurred. (Adquate disclosure of the omission is also sufficient to prevent the 6-year statute from applying.)

The moral of the story: If you have a situation, like Son of BOSS, where the IRS claims the 6 year statute of limitations applies because of overstating basis or cost of an item sold, you are better off fighting the statute of limitation issue in the Tax Court than the District Court (particularly if that DIstrict Court happens to be in Florida).

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On July 18, the House Judiciary Committee approved a patent reform bill (H.R. 1908) that included a provision making tax planning techniques unpatentable. The provides that a patent couldn't be obtained for “a tax planning method”—a plan, strategy, technique, or scheme that's designed to reduce, minimize, or defer a taxpayer's tax liability, or that when implemented has that effect. However, an unpatentable tax planning method wouldn't include the use of tax preparation software or other tools used solely to perform or model mathematical calculations or prepare tax or information returns. The provision would cover tax planning with regard to any federal, state, county, city, municipality, or other governmental levy, assessment, or imposition (whether measured by income, value, or otherwise).

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