Friday, December 16, 2011
Sunday, November 27, 2011
Robert Willson opened a bar in 1986, and it gave him nothing but trouble. He’s seen lawsuits, endless repairs, and even a catastrophic fire. One might say the City of Des Moines did him a favor when it finally condemned the land in 2000 to expand its airport--right around the time Willson began serving a federal prison term. But the Commissioner wouldn’t let things be and says that the condemnation triggered a large capital gain that Willson didn’t correctly report. This meant the bar would give him one more headache--because, though Willson represented himself at trial, the facts as he described them would be worthy of an advanced exam problem in tax accounting....
Willson did his best to explain in as plain a way as possible the history of the property and what he spent on it. We will try to return the favor by minimizing taxspeak. . . .
[T]he bar became a local mecca for a type of “rock and roll” called “glam metal.” While the Court took no expert testimony on the nature of such groups, it did allow into the record Willson’s own explanation of this genre of musical entertainment. We also took judicial notice that “hair bands” had lost much of their popularity with the coming of something called “grunge rock” (another type of “rock and roll” music) in the early nineties. This was important to Willson’s business because “hair bands,” with such unlikely names as Head East, Great White, and Saturn Cats could still draw large crowds to a bar on the outskirts of Des Moines but had become affordable providers of live entertainment. Willson even invited one of these “hair bands” to be a sort of artist-in-residence. One night in 1994, a few band members did something to a smoke machine that sparked an enormous fire. This fire engulfed everything except the parking lots, the shed, and the property’s original house. It also forced Willson to make a choice--sell to the City as part of its airport expansion, or rebuild. Willson was unable to sell, so he had to rebuild. He rented out the old house to a tenant who installed minor improvements (e.g., poles) and opened an establishment felicitously--and paronomastically--called the “Landing Strip,” in which young lady ecdysiasts engaged in the deciduous calisthenics of perhaps unwitting First Amendment expression. . . .
Des Moines began moving to condemn the bar and the land sometime in 1999. Willson closed the bar doors by May 5, when he transferred the property to his lawyer for safekeeping until the matter with the City was resolved. His criminal troubles-- something to do with money and drugs and possibly the bar--were reaching the point where Willson was about to begin serving a federal prison term, and he authorized his lawyer to act for him in dealing with the City while he was imprisoned. ...
Despite his legal problems, however, Willson did manage to file his 2000 tax return. The Commissioner determined that he had underreported his income. Willson timely filed a petition to contest the Commissioner’s determination, but trial was postponed for several years while he served out his sentence. The one remaining issue is Willson’s adjusted basis in the property at the time of the condemnation. ...
The Commissioner, however, doesn’t divide the $160,000 cost of the real estate between the land and the buildings. This is a critical mistake. ...
(Hat Tip: Bob Kamman.)
Friday, November 25, 2011
Petitioner works as a patent attorney for the Department of Energy at a national laboratory, holds a Government security clearance, and is subject to detailed and periodic background investigations.
In 2007, petitioner's wife received interest income from a trust created by her mother's estate. The funds were attributable to litigation resolved in favor of the estate. As a beneficiary of the trust, petitioner's wife received a Schedule K-1, Beneficiary's Share of Income, Deductions, Credits, etc., reporting the interest income. Prior to this instance, the couple had never received a Schedule K-1 and were unfamiliar with the form.
Petitioner usually takes the lead in preparing the couple's joint Federal income tax returns. He prepared the couple's joint income tax return for 2007 using tax return preparation software. Because he had never dealt with a Schedule K-1 in the past, petitioner upgraded his tax preparation software to a more sophisticated version as a precaution to ensure proper treatment of the unfamiliar form.
Using the upgraded software's interview process, petitioner correctly entered the name and tax identification number of the trust, properly reporting the source of income. While transcribing the remaining information, however, he made a data entry error that prevented the amount of interest income from being correctly displayed on Schedule E, Supplemental Income and Loss, of his Federal tax return. Petitioner reviewed the Federal tax return before filing, including using the verification features in his tax preparation software, but did not discover the error. ...
This Court has observed that "Tax preparation software is only as good as the information one inputs into it." Bunney v. Commissioner, 114 T.C. 259, 267 (2000). An isolated transcription error, however, is not inconsistent with a finding of reasonable cause and good faith. Reg. § 1.6664-4(b)(1).
We found petitioner to be forthright and credible, and we credit his testimony at trial. We conclude that he made an isolated error in transcribing the information from his wife's Schedule K-1 while using the tax return preparation software. [Fn.4] It is clear that his mistake was isolated as he correctly reported the source of the income, and he did not repeat any similar error in preparing his tax return.
Fn.4: We note that petitioner holds a Government security clearance and is subject to periodic background investigations, which, as he is well aware, provide substantial motivation for him to properly report income on his tax return.
The most important factor in deciding whether a taxpayer acted with reasonable cause and in good faith is the extent of the taxpayer's effort to assess the proper tax liability. ... Under the unique facts and circumstances of this case, we hold that petitioner acted with reasonable cause and in good faith within the meaning of § 6664(c)(1). Accordingly, petitioner is not liable for the accuracy-related penalty under § 6662(a) as determined by respondent in the notice of deficiency.
Prior TaxProf Blog coverage:
- Geithner Blames Turbo Tax For His Tax Troubles (Jan. 22, 2009)
- TurboTax, Geithner Edition (June 30, 2009)
- Tax Court Rejects Taxpayer's Attempt to Use Geithner's TurboTax Defense (Aug. 26, 2009)
- Tax Court Rejects "Geithner Defense," Says Reliance on TurboTax Does Not Excuse Taxpayer From Penalty for Errors on Tax Return (Apr. 20, 2010)
- Tax Court Rejects Geithner/TurboTax Defense (June 23, 2010)
- Tax Court Again Rejects Geithner/TurboTax Defense (Nov. 12, 2010)
Tuesday, November 15, 2011
A judge will hold a hearing to determine whether to grant a new trial to Paul Daugerdas, a former lawyer at the defunct firm Jenkens & Gilchrist, and three others convicted in a 10-year tax-shelter scheme.
U.S. District Judge William Pauley in Manhattan said today he will hold an evidentiary hearing on the conduct of Catherine Conrad, Juror No. 1 in the 10-week trial. He didn’t set a date. The defendants claim Conrad hid details of her background from the court, including a law degree, at least four arrests and the fact that she was serving a sentence of probation for shoplifting.
- ABA Journal, Hearing OK’d re Convicted Tax Lawyer’s Claim That Juror’s Hidden Legal Past Prevented Fair Trial
Issue: Whether the Equal Protection Clause precludes a local taxing authority from refusing to refund payments made by those who have paid their assessments in full, while forgiving the obligations of identically situated taxpayers who chose to pay over a multi-year installment plan.
- Jack Bogdanski (Lewis & Clark), Supreme Court Takes Local Sewer Tax Case
- Calvin Massey (New Hampshire), Taxes and Equal Protection
Wednesday, November 9, 2011
Orin Kerr (George Washington), The Case for Not Deciding the Constitutionality of the Mandate:
Judge Kavanaugh wrote a separate opinion in the DC Circuit’s mandate case that many readers will overlook: It’s based on the tax code, and the opinion itself acknowledges that its analysis is dense and difficult. (“The Tax Code is never a walk in the park. . . . I caution the reader that some of the following is not for the faint of heart.”) At the same time, Kavanaugh’s opinion closes with a very interesting prudential case for not deciding the merits of the mandate, and instead deciding the case on Anti-Injunctive Act grounds (see starting at page 51). Among them, Kavanaugh argues that if the Court doesn’t decide the issue now, it may never have to decide the issue because the statute could be easily amended to make the mandate easily constitutional under the taxing power.
(Hat Tip: Greg McNeal.)
Monday, November 7, 2011
Two companies with strong ties to Des Moines have lost their fights to avoid paying more than $100 million in taxes to the federal government.
Principal Life Insurance and Wells Fargo were part of two separate but similar efforts to claim unearned tax credits through an elaborate series of cash transactions disguised as investments, a Des Moines Register review of thousands of pages of court transcripts, exhibits and other records shows.
- Principal Life Insurance Co. v. United States, No. 4.08-cv-00082 (S.D. Iowa Sept. 30, 2011)
- Des Moines Register, Ruling Costs Principal $21 Million
- Wells Fargo Corp. v. Unites States, No. 07-3320 (D. Minn. Sept. 30, 2011)
- Des Moines Register, Wells Fargo Loses $80 Million Case
- Tax Update Blog, IRS Defeats Principal, Wells-Fargo Tax Shelters
Thursday, November 3, 2011
Issue: Whether hormone therapy and sex reassignment surgery constitute medical care within the meaning of §§ 213(d)(1)(A) and (9)(B).
Discussion: Section 213 of the Internal Revenue Code allows a deduction for the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer. Medical care, as defined in § 213(d)(1)(A), includes amounts paid for the treatment of disease. Section 213(d)(9)(B) excludes from the definition of medical care any procedure that is directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease.
Ms. O’Donnabhain paid expenses for hormone therapy and sex reassignment surgery to treat her gender identity disorder disease and deducted the costs of the treatment as medical expenses. The IRS disallowed her deduction based on the view that hormone therapy and sex reassignment surgery did not treat a medically recognized disease or promote the proper function of the body. See CCA 200603025. Ms. O’Donnabhain petitioned the Tax Court to reverse the IRS administrative determination and allow her deduction for the expenses of hormone therapy and sex reassignment surgery.
The Tax Court agreed with Ms. O’Donnabhain that her gender identity disorder is a disease within the meaning of §§ 213(d)(1)(A) and (9)(B). The court cited four bases for its conclusion: 1) the disorder is widely recognized in diagnostic and psychiatric reference texts; 2) the texts and all three experts testifying in the case consider the disorder a serious medical condition; 3) the mental health professionals who examined Ms. O’Donnabhain found that her disorder was a severe impairment; and, 4) the Courts of Appeal generally consider gender identity disorder a serious medical condition. The court held that because hormone therapy and sex reassignment surgery treat the taxpayer’s disease they are medical care, and the expenses for that medical care are deductible under § 213.
The Tax Court rejected the IRS administrative position reflected in CCA 200603025. The Service will follow the O’Donnabhain decision. The Service will no longer take the position reflected in CCA 200603025.
In O’Donnabhain, the Tax Court agreed wuth the IRS that the taxpayer's breast augmentation surgery was directed at improving her appearance and did not meaningfully promote the proper function of her body or treat disease within the meaning of § 213(d)(9)(B), and thus was “cosmetic surgery” excluded from the definition of deductible “medical care” by § 213(d)(9)(A). For more, see:
- Infanti: Dissecting O'Donnabhain (Mar. 10, 2010)
- The Tax Treatment of Gender Reassignment Surgery (June 18, 2011)
Tuesday, October 25, 2011
Petitioner claimed that as a teacher she occasionally used "candy and sugar" as student incentives. A number of the receipts she offered to substantiate these expenses also include other food items and household goods. Petitioner also testified that she purchased a U.S. savings bond that was presented to a student in recognition of community service provided to the school.
There is no evidence that the school required the purchase of the candy or the savings bond for petitioner's students. These expenses were not necessary to petitioner's job; and no matter how well intentioned, gifts to students are not deductible as business expenses.
Wednesday, October 5, 2011
Three federal courts have issued decisions in favor of the United States in three separate cases involving abusive tax shelters, the Justice Department announced today. All of the court opinions were issued on Sept. 30, 2011.
- In Southgate Master Fund LLC v. United States, the U.S. Court of Appeals for the Fifth Circuit, based in New Orleans, affirmed a lower court ruling that a company formed by billionaire Dallas banker D. Andrew Beal and others was a sham partnership that must be disregarded for federal income tax purposes. ...
- In Pritired 1 LLC v. United States, Judge John A. Jarvey of the U.S. District Court for the Southern District of Iowa prohibited Principal Life Insurance Co. from claiming more than $20 million in foreign tax credits that the company had sought based on a complex transaction involving a $300 million payment to two French banks. ...
- Finally, in WFC Holdings Corporation v. United States, Judge John R. Tunheim of the U.S. District Court for the District of Minnesota disallowed a tax refund claim for more than $80 million filed by a subsidiary of Wells Fargo & Co.
Tuesday, October 4, 2011
The 5th Circuit Federal Court of Appeals Friday nixed billionaire Texas banker Andrew Beal’s attempt to claim $1.1 billion in tax losses based on an investment of just $19 million in distressed Chinese debt. But in unanimously upholding a 2009 district court decision disallowing the losses, the three-member appeals panel agreed with the lower court that Beal isn’t liable for penalties since he had “good cause” to believe his ploy might work. The appeals decision described the penalty issue as a “close one.”
Friday’s decision is the first from an appeals court involving what the government calls the “distressed asset debt” or “DAD” shelter. The government has asserted in court papers that Beal, who is worth an estimated $7 billion, used DAD multiple times to “stockpile over $4 billion in artificial losses to shelter future income.” Beal’s lawyers did not respond Sunday to a request for comment, but he has consistently contended his tax moves were proper. (The full decision, Southgate Master Fund Limited, is available here through TaxProf blog, which first reported it yesterday.) ...
Last month, U.S. Tax Court Judge Robert A. Wherry Jr. gave thumbs down to another group of DAD tax shelters—these marketed by Harvard trained tax lawyer John E. Rogers to less wealthy investors (primarily small businessmen and doctors) in 2003 and 2004. In a ruling here deciding 15 cases, the judge also upheld the IRS’ imposition of penalties on those taxpayers. ...
Son-of-BOSS has been consistently disallowed by the courts. In his recent decision giving thumbs down to the DAD deals Rogers had structured, U.S. Tax Court Judge Wherry put the relationship of Son-of-BOSS and DAD in some perspective. He wrote:
“It seems only fitting that after devoting countless hours in the last decade to adjudicating Son-of-BOSS transactions, we have now progressed to deciding the fate of DAD deals. And true to the poet’s sentiment that `The Child is father of the Man’, the DAD deal seems to be considerably more attenuated in its scope, and far less brazen in its reach, than the Son-of-BOSS transaction.”
Less brazen, perhaps. But Wherry still imposed penalties on those who bought into DAD.
Friday, September 30, 2011
We affirm in all respects the district court’s judgment disposing of this petition for a readjustment of partnership tax items under § 6226. The plaintiff, Southgate Master Fund, L.L.C., was formed for the purpose of facilitating the acquisition of a portfolio of Chinese nonperforming loans (“NPLs”). A partnership for tax purposes, Southgate’s disposition of its portfolio of NPLs generated more than $1 billion in paper losses, about $200 million of which were claimed as a deduction by one of its partners in tax year 2002. The Internal Revenue Service determined that Southgate was a sham partnership that need not be respected for tax purposes and that Southgate’s allocation of the $200 million loss to the deducting partner should be disallowed. The district court upheld these determinations. After laying out the pertinent factual background in Part I, we explain in Part II why the district court was correct to do so. The Service further determined that the accuracy-related penalties in §§ 6662(b)(1)–(3) applied to the underpayments of tax resulting from Southgate’s treatment of its losses. On this point, the district court disagreed, disallowing the accuracy-related penalties on the ground that Southgate had reasonable cause for, and acted in good faith with respect to, the tax positions that resulted in the underpayments of tax. Although this issue is a close one, we affirm the district court’s decision to disallow the penalties.
(Hat Tip: Richard Jacobus.)
Tuesday, September 27, 2011
The Court this morning granted certiorari in the Home Concrete case from the Fourth Circuit [Home Concrete & Supply LLC v. United States, No. 09-2353 (4th Cir. Feb. 7, 2011)], thus paving the way for a definitive, nationwide resolution of the issues presented in the Intermountain cases. ... The government’s opening brief in Home Concrete is due November 14. The case will likely be argued in January, or possibly February, and the Court will issue its decision before the end of June 2012.
(Hat Tip: Kristin Hickman.)
Sunday, September 18, 2011
Wealthy taxpayers who want to make large gifts to family members recently got good news: A federal appeals court affirmed a popular technique to sidestep gift taxes.
The decision, Estate of Petter v. Commissioner, was published in August by the Ninth Circuit in San Francisco. It joins earlier rulings on related issues by the Eighth and Fifth circuits. All the cases originated in Tax Court, but appeals go to the federal circuit court in which the taxpayer lives.
"These decisions make it easier for senior family members to transfer hard-to-value assets to heirs and charity with reduced gift-tax risk," says John Porter of Baker Botts in Houston, who argued all the cases. These and other victories have made him a rock star in the staid trust-and-estates bar. ...
[Valuation is] always an issue with large gifts, especially with real estate or a business. What if the IRS challenges an estimate and wants more gift taxes? Many taxpayers are loath to write a check, and some don't have ready cash. Petter offers a solution. ...
Estate planners advised Ms. Petter to transfer all the [$22 million of] UPS stock to a limited-liability company. Then she both gave and sold units of the LLC to two of her children in 2002. Ms. Petter claimed that putting the stock in the LLC entitled her to a 51% discount from its market value on the transfers made to her children. The IRS challenged that, and the two parties ultimately settled on a 36% discount.
The crux of the case: Was gift tax due once the discount dropped to 36% from 51%? ... But she had specified that in such a case they would bounce to her IRS-registered charity—with no gift tax due. The IRS didn't like that one bit, because it meant the penalty for an exaggerated discount was simply a donation to a charity, not a check to Uncle Sam.
"The government said if Ms. Petter prevailed, it had no incentive to audit," says Carlyn McCaffrey, an attorney at McDermott, Will & Emery in New York. The IRS's real fear, says retired tax expert Tom Ochsenschlager, is that without audits, taxpayers could "get away with murder on valuations."
The courts sided with Ms. Petter, giving a lift to taxpayers and charities, if not the IRS.
Tuesday, September 6, 2011
Saturday, September 3, 2011
(Hat Tip: Richard Jacobus.) Prior TaxProf Blog coverage:
- Court Rejects $1.1b Tax Losses Claimed by Andrew Beal in DAD Tax Shelter (Aug. 20, 2009)
- Andrew Beal Appeals Denial of $1.1b DAD Tax Shelter Losses (May 31, 2010)
- 5th Circuit to Hear Andrew Beal's Appeal of $1.1b DAD Tax Shelter Loss (Aug. 1, 2010)
- DOJ Sues Former Seyfarth Shaw Partner Over DAT/DAD Tax Shelters (Nov. 4, 2010)
Friday, September 2, 2011
Whether a person who is performing services ends up characterized as an employee or as an independent contractor affects a variety of tax issues. For example, the payor’s withholding responsibilities differ, employees being subject to withholding but most independent contractors not being subject to withholding. As another example, if the person is an independent contractor, the person is subject to self-employment taxes barring the application of an exception, whereas the person’s status as an employee means that the social security and Medicare tax responsibility is split between the employee and the employer. A very recent case indicates yet another significance, namely, whether deductible expenses incurred in the performance of the services are deductible in computing adjusted gross income, on Schedule C, or are deductible as employee business expenses, on Schedule A, subject to the 2-percent-of-adjusted-gross-income floor. This recent case caught my eye because the taxpayer was performing services as an adjunct professor. ...
The taxpayer’s situation in Schramm is very similar to that of adjunct faculty generally. It certainly is very similar to the manner in which my Law School treats adjuncts. The major difference is that adjuncts are permitted to select textbooks rather than being told what textbook to use, though they do receive advice and recommendations on that point. It is possible that some of our adjunct faculty do not maintain home offices for their teaching activities, but I’ve never asked and I don’t think anyone has ever asked. Newly-hired adjunct faculty, of course, lack the permanency of relationship that existed in Schramm, though that factor alone will not change the outcome. Next time I speak with one of our adjuncts, I need to remember to ask if they receive a Form W-2 or a Form 1099. Strange that I’ve never had this conversation, but I’ve never been involved in the payroll side of things. Perhaps I’ll also ask if they have any deductible expenses related to their teaching, because the school does make available to adjuncts computers and similar equipment. My guess is that, like me, they do have computers used for teaching and other business purposes, and pay for an internet connection through which they connect to the on-line classrooms and exchange emails with students, other faculty, and law school administration.
Wednesday, August 31, 2011
Monday, August 29, 2011
This case involves a deficiency of $3,910,000 determined by respondent in the 2001 Federal income tax of Kenneth L. Lay and Linda P. Lay (the Lays). The deficiency is based upon respondent’s determination that the Lays received income as a result of the sale of two annuity contracts to Enron Corp. (Enron). For the reasons stated herein, we find that they did not receive the income determined by respondent and are not liable for the deficiency. ...
Enron paid Mr. and Mrs. Lay $10 million in exchange for the annuity contracts. Enron intended for the full amount of its payment to be consideration for the annuity contracts. The annuities transaction is well documented, and all actions of the parties to the transaction reflect that Enron purchased the annuity contracts for $10 million. The Lays properly reported the transaction on their 2001 tax return as a sale of their annuity contracts.
(Hat Tip: Bob Kamman.)
Update: Bloomberg, Enron CEO Kenneth Lay Bests IRS in Tax Court
Saturday, August 27, 2011
A Texas statute requires a business that offers live nude entertainment and allows the consumption of alcohol on its premises to remit to the Comptroller a $5 fee for each customer admitted. We are asked to decide whether the statute violates the right to freedom of speech guaranteed by the First Amendment to the United States Constitution. We hold it does not.
Prior TaxProf Blog coverage:
- Texas Imposes "Pole Tax" on Strip Club Patrons (Dec. 22, 2007)
- Texas "Pole Tax" on Strip Club Patrons Ruled Unconstitutional (Apr. 1, 2008)
- Texas Legislator Files Amicus Brief in Support of 'Pole Tax' (Dec. 11, 2009)
- Texas Supreme Court to Decide Constitutionality of 'Pole Tax' (Feb. 15, 2010)
Thursday, August 18, 2011
Petitioner has a master’s degree in accounting from Florida International University. He worked for the Internal Revenue Service for 7 years, working as a tax technician, revenue agent, Appeals auditor, and Appeals officer. In 1985 petitioner started the accounting business he continues to operate today. This business provides tax return preparation services and has helped prepare approximately 180-220 returns per year.
Petitioner has two daughters. In 2007 his daughters were 17 and 20 years old, respectively. His older daughter was a fulltime student at Rutgers University from September 1, 2005, through May 9, 2007. His younger daughter was a high school student in 2007. Petitioner’s daughters provided administrative assistance in his accounting business, but the business did not issue either a Form W-2, Wage and Tax Statement, or a Form 1099- MISC, Miscellaneous Income, to report any wages to either daughter. Petitioner paid his daughters’ credit card bills....
Petitioner used one of the bedrooms of his residence exclusively as his office for his accounting business. Petitioner argued that he also used the hallway and the bathroom adjacent to this bedroom exclusively for his accounting business. Petitioner testified, however, that his children and other personal guests occasionally used the bathroom. Accordingly, the hallway and the bathroom were not used exclusively for business purposes. ...
Petitioner argues that both his daughters were paid wages for administrative work performed for his accounting business in 2007. However, neither daughter was issued a paycheck, Form 1099-MISC, or Form W-2. Further, neither had tax withheld. Petitioner testified that he paid his daughters for their work by paying their credit card bills but has not provided any evidence to substantiate amounts paid. Accordingly, we sustain respondent’s determinations with respect to the wages paid to petitioner’s daughters.(Hat Tip: Bob Kamman.)
Tuesday, August 16, 2011
Counsel for former Jenkens & Gilchrist partners Paul Daugerdas [right, featured in The American Lawyer December 2003 cover story, Helter Shelter] and Donna Guerin and their co-defendants have charged that a juror at their trial for a massive illegal tax shelter scheme hid the fact that she had practiced law, had been suspended from practice for alcohol dependency and professional misconduct, that an appellate court had refused to reinstate her because of mental illness and that there was an outstanding warrant for her arrest.
Tuesday, July 26, 2011
Petitioner operated his Web site business using the accrual method of accounting. In 2007 petitioner worked 1,000 hours developing the Web site. Petitioner charges unrelated parties between $45 and $55 an hour for performing work similar to that which he performed on his Web site development. Petitioner's proprietorship, the Web site, did not pay him for any services he performed for himself. Petitioner's proprietorship accrued $50,000 as a liability for payment to petitioner for his work to set up his Web site, and the accrued expense was deducted on Schedule C of the return. ...
On the issue of his accrual, petitioner testified that he is an accountant. As an accountant petitioner should be familiar with the concept of imputed or implicit expenses or costs (imputed expenses). Imputed expenses are the opportunity costs of time and capital that the manager of a business has invested in producing "the given quantity of production and the opportunity cost of making a particular choice" among alternatives. Siegel & Shim, Dictionary of Accounting Terms (Barron's Business Guides) 234 (5th ed. 2010). An imputed expense is one that is not actually incurred but is used to compare with an actual cost. Oxford Dictionary of Accounting 227 (Gary Owen & Jonathan Law eds., 4th ed. 2010); Tracy, Accounting for Dummies 237 (3d ed. 2005). An imputed cost is not recorded in the books of account and is not accurately measurable but is a hypothetical cost used in making comparisons; an example is "salaries of owner-directors of sole proprietorship firms." Rajasekaran & Lalitha, Cost Accounting 12 (2011).
From an accounting standpoint, the time petitioner spent on his own Web site instead of earning $45 to $55 an hour from unrelated parties is an opportunity cost, an imputed expense to petitioner and his business. It is not an incurred expense, is not reflected in the financial statements, and is not an actual cost. ....
Respondent cited several cases for petitioners' and the Court's consideration on this issue. In Maniscalco v. Commissioner, T.C. Memo. 1978-274, the Court observed that "Whatever may be said in behalf of taking into account the value of one's own services in lieu of paid labor, such services are not considered an element of the deduction under sec.162(a). ... Petitioner argues that all these cases involve cash basis taxpayers, and he agrees that a cash basis taxpayer cannot deduct a payment to himself in the same year. However, he argues inexplicably that because his business was on the accrual method the cases respondent cites not only are inapposite but also support his position. [Fn.2]
[Fn.2: Petitioner cited Remy v. Commissioner, T.C. Memo. 1997-72, as supporting his position. The Court in that case held that a cash basis taxpayer could not deduct the value of his labor under sec. 162 because it was not paid or incurred. Petitioner interprets the case to mean that an accrual basis taxpayer can deduct the value of his labor, a logical fallacy.]
Perhaps petitioner did not read Rink or he failed to read it carefully. The Court pointed out in that case that the taxpayer took the position, as petitioner does, that "he should be permitted to accrue currently, as a liability, amounts owed by him to himself on account of his labors, but include the value of such labor in income only when and if such labor gives rise" to income in the future. The Court found the argument to be without any merit; "For one thing, we have found that the petitioner incurred no liability, in favor of himself or anyone else, to pay for the value of his services." Id. at 753-754 (emphasis added). ...Neither accounting principles, tax law, nor common sense supports a deduction by petitioners for contract labor as a result of an accrual of an amount "owed" by petitioner to himself for his own labor.
- Jim Maule (Villanova), The Value of Tax Education
- Tax Lawyer's Blog, Accountant Tries to Deduct Value of His Own Services
- Tax Update Blog, If Time Is Money, Why Can't I Deduct It?
Wednesday, July 13, 2011
The D.C. Circuit’s recent en banc decision in Cohen v. United States, No. 08-5088, in some ways represents a significant statement regarding the availability of judicial review for Administrative Procedure Act (APA) procedural challenges in the tax context. At a minimum, the court’s decision embraces the Supreme Court’s recent rejection of tax exceptionalism in Mayo Foundation for Medical Educ. & Research v. United States, 131 S.Ct. 704 (2011). Nevertheless, the decision’s practical implications for APA procedural challenges against Treasury and IRS actions are substantially less clear and potentially minimal.
[T]he issues we must decide are: (1) Whether the estate is entitled to deduct [$1,240,000] as an expense the claim on the estate tax return for services rendered by Anthony M. Olivo (Mr. Olivo), the son of Emilia W. Olivo (decedent) to decedent before her death; (2) whether the estate is entitled to deduct the [$44,200] administrator’s commission paid to Mr. Olivo; and (3) whether the estate is entitled to deduct the [$55,000] accountant’s and attorney’s fees claimed by Mr. Olivo.
Mr. Olivo, the administrator of the estate, resided with decedent at the time of her death and had provided care for her for many years before her death. Mr. Olivo began providing nearly full-time care for decedent and her late husband, Matthew W. Olivo, his parents (we sometimes refer to Matthew W. Olivo as his father), around September 18, 1994. ...
[D]uring September 1994, Mr. Olivo began to find it increasingly difficult to maintain his practice as an attorney. He had received his J.D. from Rutgers University School of Law (Camden) in 1976 and his LL.M. in taxation from New York University School of Law in 1979. Mr. Olivo practiced law at private firms in Cherry Hill, New Jersey, from 1976 until 1988, when he began his own practice. However, his solo practice began to disintegrate during the mid-1990s, in part because of the amount of time he devoted to his parents’ health problems. He earned no significant income from his law practice during the period when he was caring for his parents, from 1994 through 2003....
Mr. Olivo’s care for decedent during the last years of her life was extraordinary, and the efforts he expended on her behalf are commendable. However, we conclude that the estate has not established that Mr. Olivo is entitled to recover for that care....
Applying the statutory formula to the estate value of $1,711,163.81 reported on the return yields an administrator’s commission of $52,223.28. ...
The record shows that Mr. Olivo did perform some legal services for the estate, in addition to his services as administrator. For instance, he filed the estate’s tax return,handled the IRS examination on behalf of the estate, and filedthe estate’s original petition with this Court. However, the record does not establish the value of his legal services. Mr. Olivo kept no records of the time he spent performing legal services for the estate. Instead, he merely estimated the numberof hours and used a billing rate of $150 per hour. On account of the lack of corroborating evidence in the record concerning theattorney’s fees issue, we decline to accept Mr. Olivo’s estimates of the amount of time he spent performing legal services for the estate.
(Hat Tip: Bob Kamman.)
Wednesday, July 6, 2011
Marciano had argued that the audit could reveal money owed to the government that he believes former employees mishandled. In dismissing the suit on Friday, U.S. District Court Judge Henry Kennedy Jr. noted that the property rights protected under the Fifth Amendment don't guarantee anyone's right to pay taxes.
In his complaint, Marciano claimed that he uncovered evidence of “substantial financial irregularities” in his personal and business affairs around 2005. He believed he was the victim of identity theft, fraud, embezzlement and a host of other financial crimes.
As part of his investigation into these irregularities, Marciano alleges that he repeatedly asked the IRS for copies of previous years’ tax returns, but was told that they were unavailable. He claims he also asked the IRS to do an audit of his previous returns, but they refused. ...
The IRS moved to dismiss the suit, claiming Marciano had failed to state a viable claim and that the court lacked jurisdiction.
In his opinion,Kennedy sided with the IRS, finding that Marciano had failed to exhaust administrative remedies and that Marciano could not sue the IRS through statutes designed to give individuals legal remedies in cases where the IRS is demanding payment. ...
“The extraction by the government of money or property via taxation implicates a constitutionally protected property interest, but, as noted above, Marciano has asserted repeatedly that he owes the government money, rather than the reverse,” Kennedy wrote. “The Court is aware of no precedent establishing a protected property interest in the ability to pay taxes.”
Saturday, July 2, 2011
A divided federal appeals court in Washington said a group of taxpayers will be allowed to challenge the procedure the IRS set up to refund billions of dollars collected through an unlawful tax on telephone calls. [Cohen v. United States, No. 08-5808) (D.C. Cir. July 1, 2011) (en banc)]
The full U.S. Court of Appeals for the D.C. Circuit voted 6-3 to send back to the trial court a dispute over whether the IRS refund procedure is unconstitutional. The 10 plaintiffs want an injunction ordering the IRS to craft a new refund method.
The appeals court did not take a stance on the merits of the IRS’s refund scheme, instead addressing only whether the court has oversight. The court ordered additional proceedings in the U.S. District Court for the District of Columbia. ...
At issue is whether the plaintiffs must first file refund claims with the IRS and then litigate their dispute in tax suits or whether the group of taxpayers can sue under the Administrate Procedure Act without taking any of the earlier steps. A report issued by the Treasury Inspector General for Tax Administration said the IRS illegally collected $8 billion between February 2003 and August 2006.
The six judges in the majority, including Janice Rogers Brown, who wrote the opinion for the court, rejected the IRS claim that the suit is barred because it seeks restraint of the assessment and collection of taxes. The IRS, the majority said, sees a world in which “no challenge to its actions is ever outside the closed loop of its taxing authority.”
“This suit is not about the excise tax, its assessment or its illegal collection. Nor is it about the money owed the taxpayers,” Brown said. “This suit is about the obstacle course, and the decisions made by the IRS while setting it up.”
Brown said the suit is permitted under the Administrative Procedure Act because it “questions the administrative procedures by which the IRS allows taxpayers to request refunds for the wrongfully collected excise tax.” ...
The IRS, Brown wrote, is no victim. The taxpayer plaintiffs “are not raiders in pursuit of an unwarranted windfall.” The plaintiffs, the court said, “are aggrieved citizens in search of accountability.”
Wednesday, June 22, 2011
Much like the Federal Circuit, the D.C. Circuit applied Chevron analysis to conclude that § 6501 is ambiguous and that Treasury's interpretation of that provision is reasonable. Because the statute is ambiguous, the Supreme Court's decision in Colony does not foreclose Treasury's interpretation. Whether or not the temporary regulations were procedurally flawed for APA purposes, Treasury finalized them using notice and comment. Treasury's “searching consideration” of the sole comment received in that process, as expressed in the preamble to the final regulations, demonstrated a sufficiently “open mind” to “cure” any procedural problem posed by the use of temporary regulations. (The court did not address at all whether or not the use of temporary regulations without notice and comment complies with the APA. Instead, the court only addressed the argument that the final regulations were procedurally flawed because they had been initially adopted as temporary regulations without notice and comment and the agency failed to keep an open mind in promulgating the final regulations.)
Update: For more, see Miller & Chevalier's Tax Appellate Blog.
Prior TaxProf Blog coverage:
- Johnson: Intermountain, Interpretive Regulations, and Brand X (May 20, 2010)
- Johnson: Intermountain and the Importance of Administrative Law in Tax Law (Aug. 25, 2010)
- Federal Circuit Exacerbates Split on Overstatement of Basis and 6-Year SOL (Mar. 12, 2011)
- Harvard Law Review on Intermountain (Mar. 24, 2011)
Monday, June 20, 2011
Schering-Plough further complains that the IRS had inappropriate motives for pursuing its audits and requests discovery to explore this allegation further. The language from IRS documents that Schering-Plough quotes indicates that at least one IRS agent thought that Schering-Plough’s approach to determining its tax liabilities was less than conscientious, given prior findings of evasion (which were upheld by this circuit, as the District Court noted, see Schering-Plough Corp.). The chutzpah of this argument is notable. To the extent that the IRS pursued Schering-Plough more vigorously because Schering-Plough had a history of failing to comply with the tax laws, this represents commendable agency diligence in the light of past experience, not some kind of impermissible bias against Schering-Plough. Schering-Plough offers no persuasive basis for us to order further discovery.
(Hat Tip: Richard Jacobus.) For more, see Subpart F and Schering-Plough, 60 Emory L.J. 503 (2010).
Thursday, June 16, 2011
The IRS's seven year campaign against questionable charitable deductions for the donation of historic building facade easements has ratcheted up another notch. On Tuesday, the Department of Justice filed a lawsuit seeking to enjoin the non-profit Trust for Architectural Easements from practices that allegedly promote improper and inflated easement deductions.
The suit, filed in Federal District Court in Washington, D.C., also demands the names of 800 property owners in New York City, Boston and Baltimore who have claimed charitable deductions totaling more than $1.2 billion for the donation of easements to the Trust. ...
The government’s 38-page lawsuit alleges, among other things, that the Trust made “false and fraudulent” statements to prospective donors about the tax benefits available for donating facades; steered donors to appraisers who had been “coached” by it to go along with its questionable practices; helped donors to claim deductions before donations were final; and allowed donors to terminate easements they had already granted. ...
The IRS itself has come under criticism from some tax practitioners for its aggressive stance on historic easement donations, which it included in its “Dirty Dozen” list of tax scams for 2005 and 2006. In a 2009 report, the IRS Advisory Council said that the agency’s “strict view” was “diluting” the tax incentive Congress created in 1976 for the donation of easements that protect a historic property by restricting facade changes or development in perpetuity. The IRS’ aggressive audits, the report added, “have added to the perception that the IRS is overreaching on this issue.”
Tuesday, June 14, 2011
Mr. Woodsum terminated the swap ahead of its set termination date because his watchful eye noted that it was not performing satisfactorily as an investment. That is, when his own receiving of income was in question, Mr. Woodsum was evidently alert and careful. But when he was signing his tax return and reporting his tax liability, his routine was so casual that a halfmillion- dollar understatement of that liability could slip between the cracks. We cannot hold that this understatement was attributable to reasonable cause and good faith.
(Hat Tip: Bob Kamman.)
Monday, June 13, 2011
As the criminal case against the former Hollywood tax lawyer Matthew Krane heads to a conclusion — Mr. Krane is to be sentenced after pleading guilty to tax evasion and making a false statement on a passport application — the Treasury Department can breathe a little easier about the deficit.
According to a supplemental sentencing memorandum filed Wednesday with the United States District Court for the Western District of Washington in Seattle, Mr. Krane has entered an agreement with the IRS, his former client Haim Saban, and others under which the federal government is to receive $23 million of the approximately $46.6 million Mr. Krane and others were accused of siphoning from a Saban deal in 2002.
- ABA Journal, Suspended LA Lawyer Gets 32 Months, Must Repay $41M, in Quellos Tax-Shelter
- Accounting Today, Lawyer Sentenced in Quellos Tax Shelter Scheme
- Forbes, Show Biz Lawyer Finally Sentenced in Massive Fraud Case
- Sacramento Bee, CA Man Gets 2 1/2 Years in Prison for Tax Evasion
(Hat Tip: Bob Kamman.)
Following up on last week's post, Attorney Can Deduct Some, But Not All, Expenses of Caring for 70-80 Foster Cats:
Wall Street Journal, Stray Cat Strut: Woman Beats IRS, by Laura Saunders:
When Jan Van Dusen appeared before a U.S. Tax Court judge and a team of Internal Revenue Service lawyers more than a year ago, there was more at stake than her tax deduction for taking care of 70 stray cats.
Hanging in the balance were millions of dollars in annual tax deductions by animal-rescue volunteers across the nation—and some needed clarity on the treatment of volunteers' unreimbursed expenses for 1.55 million other IRS-recognized charities.
Early this month, Ms. Van Dusen learned she had won her case. "I was stunned," she said. "It feels great to have established this precedent."
The Tax Court allowed her to take a charitable deduction for expenses she incurred while taking care of the cats in her home for an IRS-approved charity, Fix Our Ferals. Among the $12,068 in expenses she deducted: food, veterinarian bills, litter, a portion of utility bills, and other items such as paper towels and garbage bags.
The decision, in Van Dusen v. Commissioner, paves the way for volunteers of animal-rescue groups like the ASPCA and Humane Society of the U.S. to deduct unreimbursed expenses that further the groups' missions, such as fostering stray animals.
It also clarifies rules for anybody deducting unreimbursed charitable expenses of $250 or more, especially if they involve use of a home.
Strip Club Liable for $125k Sales Tax; Lap Dances Are Not Tax-Exempt as 'Musical Performances' or 'Theater-in-the-Round'
Albany Times-Union, Court: Lap Dances Aren't Tax-Exempt:
While a lap dance might prompt a strong reaction from an audience, it doesn't rise to the level of art -- at least according to a state appellate court.
Thursday's ruling said entertainers at a local strip club are subject to sales taxes, and their expressions are not considered choreographed artistic performances that would be exempt.
Nite Moves, an adult "juice bar" on Route 9 in Latham, has been fighting the tax law -- first in an administrative hearing and then in court -- following a 2005 audit by the state Division of Taxation that concluded the club owed nearly $125,000 in sales tax, plus interest for door admission charges and private dance sales. The Appellate Division of state Supreme Court upheld that decision in an unanimous opinion.
Patrons at Nite Moves "view exotic dances performed by women in various stages of undress," the decision said. Revenue is generated from admission charges, "couch sales" -- the fee charged when a dancer performs for a customer in one of the club's private rooms -- as well as register sales from the non-alcoholic beverages sold and house fees paid by the dancers to the club.
- Daily Mail, 'Stripping Is NOT Art': NY Ruling Means Lap Dancing Is a Taxable Service
- NY Daily News, Lap Dance Tax? Court Says Erotic Dances Are Not Art, Subject to Sales Tax
- NY Post, Taxman in $lap Dance: Hand in Clubs' Pockets
- Reuters, NY Court Rules Private Lap Dances Not Tax Exempt
- Wall Street Journal, NY Court Says Juice Bar's Lap Dances are Taxable
- Washington Post, NY Court: Strip Club Has to Pay Taxes on Lap Dances Because They’re Not Artistic Performances
Saturday, June 11, 2011
As a law professor, I routinely commute from my home in New Haven, Connecticut to Manhattan where I teach my classes at the Cardozo Law School of Yeshiva University. On most days when I don’t teach, I work at home. Modern technology (e.g., the internet, email, legal databases like Lexis and Westlaw) allows me to research and write at my residence in Connecticut while staying in touch electronically with my Cardozo students and colleagues. Given its obvious benefits, such “telecommuting” is blossoming.
On days when telecommuting nonresidents like me work at our out-of-state homes, New York takes the irrational position that we are really working in the Empire State, though in fact we are outside New York’s borders. By the legal fiction known as the “convenience of the employer” doctrine, New York assesses income taxes for nonresident telecommuters’ work-at-home days – even though we do not set foot in New York on those out-of-state days. New York’s convenience of the employer doctrine typically results in double taxation on the days nonresident telecommuters work at their out-of-state homes.
When I challenged New York’s convenience of the employer rule as unconstitutional, I found myself in a prolonged and public controversy over New York’s irrational taxation of nonresident telecommuters. I ultimately lost my case in New York’s highest court.
John J. Barker of New Canaan, Connecticut now finds himself enmeshed in an equally convoluted controversy about New York’s self-destructive tax policies vis-a-vis nonresidents of the Empire State. Mr. Barker was an investment manager who commuted regularly from his home in New Canaan to his office in Manhattan. ... New York concedes that the Barkers were domiciled in Connecticut from 2002 through 2004. Nevertheless, New York insists that the Barkers were New York residents and owe a second, New York income tax on their investment income by virtue of the modest beach house the Barkers owned in Napeague, New York. The Barkers used this house for short, sporadic vacations. In 2002, for example, the Barkers used their small New York beach house five times for a total of only nineteen days. ...
New York’s Tax Appeals Tribunal recently sustained this double tax. Even though the Barkers stayed at their small New York beach house for a handful of days each year, the Tribunal let the Department tax the Barkers as New York residents by virtue of their minimally-used vacation home.
Mr. Barker thus threatens to displace me as the poster boy for New York’s systematic overtaxation of nonvoting nonresidents.
Prior TaxProf Blog coverage:
- Bill to Prohibit NY Tax on Prof's Salary Attributable to Work in CT Home Office (Sept. 15, 2004)
- NY Court of Appeals to Hear Telecommuter Tax Case (Jan. 3, 2005)
- NY Court of Appeals Upholds Tax on Non-Resident Telecommuter (Mar. 30, 2005)
- Update on NY Telecommuter Tax (May 8, 2005)
- WSJ: NY Alters Telecommuter Tax Rule (May 31, 2006)
- NY Times: Taxing Telecommuters (Aug. 6, 2006)
- Zelinsky: NY's "Convenience of the Employer" Rule Is Unconstitutional (May 9, 2008)
- Swine Flu, Telecommuting and NY’s Taxation of Nonresidents’ Incomes (May 6, 2009)
- NY's 'Convenience of the Employer Test' (Dec. 30, 2009)
- Court: NY Can Tax Income of Owner of NY Vacation Home Used 17 Days/Year (Feb. 11, 2011)
Monday, June 6, 2011
- Is an accused person deprived of the right under Article III and the Sixth Amendment to be tried only by a jury of the community where venue is proper, when factual questions determinative of whether venue has been correctly laid are determined solely by a jury selected in the place challenged by the defendant as incorrect?
- Where venue is a contested factual issue in a criminal trial, does the government bear a burden of proof beyond a reasonable doubt or only by a preponderance of the evidence?
Van Dusen, a resident of Oakland, California, is an attorney who cared for cats in her private residence in 2004. Van Dusen volunteered for an organization called Fix Our Ferals and argues that her out-of-pocket expenses for caring for cats qualify as charitable contributions to that organization. The parties stipulate that Fix Our Ferals is a § 501(c)(3) organization. ...
Van Dusen was a Fix Our Ferals volunteer in 2004. She trapped feral cats, had them neutered, obtained vaccinations and necessary medical treatments, housed them while they recuperated, and released them back into the wild. She also provided longterm foster care to cats in her home. She attempted to place long-term foster cats in one of two no-kill shelters, Berkeley East Bay Humane Society or East Bay Society for the Prevention of Cruelty to Animals, or otherwise find them adoptive homes. Some foster cats, however, stayed with her indefinitely. In 2004, Van Dusen had between 70 and 80 cats total, of which approximately 7 were pets. The pet cats had names, but the foster cats generally did not. Most cats roamed freely around Van Dusen’s home (except for bathrooms) and resided in common areas. Less domesticated cats stayed in a separate room called the “feral room”. Some cats lived in cages for taming. Others lived in cages because of illness.
Van Dusen devoted essentially her entire life outside of work to caring for the cats. Each day she fed, cleaned, and looked after the cats. She laundered the cats’ bedding and sanitized the floors, household surfaces, and cages. Van Dusen even purchased a house “with the idea of fostering in mind”....
We find that taking care of foster cats was a service performed for Fix Our Ferals, a § 501(c)(3) organization that specializes in the neutering of wild cats. Some of Van Dusen’s expenses are categorically not related to taking care of foster cats and are therefore not deductible. These expenses are the cost of cremating a pet cat, bar association dues, and DMV fees. Some of Van Dusen’s other expenses are not solely attributable to foster cat care and are not deductible. These expenses are the cost of repairing her wet/dry vacuum and her membership dues at a store.
Other expenses are attributable to the services Van Dusen provided to Fix Our Ferals. These expenses are 90% of her veterinary expenses and pet supplies and 50% of her cleaning supplies and utility bills. Some payments to Orchard Supply Hardware and Lowe’s for pet supplies, however, are disallowed because the amounts spent on pet supplies cannot be determined with precision. In deciding whether Van Dusen kept adequate records of the expenses attributable to her volunteer services, we hold that the regulatory requirements for money contributions govern Van Dusen’s expenses of less than $250. Van Dusen has met the requirements for these less than $250 expenses. Her records are acceptable substitutes for canceled checks under the substantial compliance doctrine. For expenses of $250 or more, however, Van Dusen does not have contemporaneous written acknowledgment from Fix Our Ferals. Therefore, these expenses are not deductible.
(Hat Tip: Bob Kamman.)
Sunday, June 5, 2011
Last December, an Iowa federal district court came out with a decision on the “John Edwards gambit” (Watson v. United States, 107 A.F.T.R.2d 311 (IA D.C. 2010)) TaxProf blog coverage here and here.] Some musings:
In Watson, the taxpayer formed an S corporation of which he was the sole shareholder. The S corporation was a partner in an accounting firm partnership. The other partners were also one-person S corporations. In 2002, Watson’s S corporation received profit distributions of $203,651 from the the partnership. In 2003, it received $175,470 in profit distributions. In each of those years, the S corporation paid Watson a salary of $24,000 per year, let the balance of the income “flow through” as nonwage income, and paid it to Watson as a dividend. The court concluded that Watson’s salary and dividend payments were an effort to avoid federal employment taxes, and that the dividends paid to Watson were remuneration for services performed. Interestingly, the court did not conclude, at it might have, that the dividends paid were income for services and subject to federal employment taxes. As expert witness testified that fair market value of Watson’s services for the years in question was about $91,044 per year, and only the difference between that amount and $24,000 was held to be subject to federal employment taxes, interest, and penalties.
Watson does not sound the death knell to the John Edwards technique. Iowa federal district courts are not the last word on tax matters. The salary the taxpayer took, while not de minimis, was quite small. Finally, and most importantly, the court looked not to the income generated by the taxpayer’s services in calculating his employment income, but rather what a third-party expert said the value of his services were worth. A significant amount of income generated by the taxpayer’s services, about $110,000 in 2002 and about $85,000 in 2003 still avoided employment taxes.
In some ways, the court’s holding provides an additional incentive to use the technique. The court’s holding permits significant amounts of income earned through services to avoid federal employment taxes, taxpayers just cannot be too greedy. Query whether it would be worth it to the Service to litigate a case where salaries equal to the social security tax maximum were paid, since it is more likely that the fair market value of services will be relatively close to such a number. Note that under the Court’s reasoning in Watson at issue is not the fair market value of the taxpayer’s own services, but those of an average, similarly situated taxpayer, whose services might be worth less than that of a given taxpayer’s. Indeed, that allegedly is what John Edwards did. According to the New York Times, he took a salary of $360,000 per year on income over 4 years of $27 million. The salary was supposedly based on what the average personal injury lawyer earned in North Carolina. Under the Iowa court’s reasoning, his approach would have survived challenge.
At this point, the future of the technique is uncertain. The Iowa court keeps the door open, indeed may open it wider, for those taking substantial salaries. However, another court might conclude that all the income is federal employment income, which would disallow the technique entirely. Further, there is a bill pending in Congress which would largely also shut this technique down.
The Health Care and Education Affordability Reconciliation Act of 2010, starting on January 1, 2013, applies an additional .9% Medicare tax on earned income exceeding certain thresholds (generally these thresholds are $250,000 if married, filing jointly, and $200,000 for single taxpayers). (The Act’s 3.8% tax on net investment income should not apply to “dividends” as S corporation shareholder receives.) The .9% tax should provide an additional incentive to use the technique.
This note analyzes the “definition” of “reasonable compensation” under the IRS's revenue ruling and how the Tax Code applies that definition in determining employment-tax liability. The revenue ruling requires compensation to shareholder-employees of a small corporation to be reasonable. The IRS’s subsequent re-characterization of “unreasonable” payments – i.e., those that should have been originally characterized as wages – subjects the re-characterized portion to penalties, interest, and additional taxes; specifically, taxes under the FICA. The case, here, involves a shareholder-employee of a Subchapter S corporation. The IRS challenged the shareholder-employee’s amount of FICA-tax liability after determining his salary was unreasonably low, by re-characterizing a portion of his distributions, or dividends, he received from his S-corporation.
Prior TaxProf Blog coverage:
- Court Gives IRS Rare Win in 'John Edwards Sub S Tax Shelter' Case (Jan. 24, 2011)
- More on the 'John Edwards Sub S Tax Shelter' (Feb. 6, 2011)
Saturday, June 4, 2011
Aiming to put an end to the systemic gender discrimination at KPMG, a former female Senior Manager filed a $350 million class action discrimination lawsuit against the company today in the U.S. District Court for the Southern District of New York. The Plaintiff, Donna Kassman, lives in New York and worked in KPMG's New York office for seventeen years before resigning as a result of gender discrimination. ...
Plaintiff Kassman alleges that KPMG engages in systemic discrimination against its female Managers, including but not limited to Managers, Senior Managers and Managing Directors. The lawsuit is intended to change KPMG's discriminatory pay and promotion policies and practices, as well as its systemic failure to properly investigate and resolve complaints of discrimination and harassment. The Plaintiff is filing this action on behalf of a class of thousands of current and former female employees who have worked as Managers at KPMG from 2008 through the date of judgment.
KPMG promotes fewer women to Partner (18%) than the industry average (23%) and fewer women to Senior Manager (35%) than the industry average (44%). "Across the accounting industry, women are conspicuously absent from leadership positions; but at KPMG, women fare even worse," said Janette Wipper. "As soon as women come within reach of partnership, the Company's male-dominated owners find ways to block their advancement,"
Wednesday, June 1, 2011
- Miller & Chevalier Tax Appellate Blog, 10th Circuit Sides With Government on Intermountain Issue
- TaxProf Blog, Fed. Cir. Exacerbates Split on Overstatement of Basis, 6-Year SOL (Mar. 12, 2011)
Thursday, May 26, 2011
Tax expenditure analysis, despite its contribution to tax policy debate, is ill-suited as a tool of constitutional decisionmaking. Sometimes tax provisions are, for constitutional purposes, equivalent to direct monetary outlays; sometimes they are not. That equivalence can only be evaluated on a case-by-case basis, considering the nature of the specific tax provision and the particular constitutional clause at issue. Contrary to the approach of the Winn dissent, the Court is ill-advised to invoke tax expenditure analysis as a tool of constitutional decisionmaking. At the end of the day, we do not know what a tax expenditure is.
This article analyzes Friedland [T.C. Memo. 2011-90 (Apr. 25, 2011)], a recent Tax Court memorandum opinion, and concludes that in light of recent Supreme Court opinions, the Tax Court was wrong to hold that the 30-day period to file a petition in a whistleblower award action cannot be equitably tolled.
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Wednesday, May 25, 2011
Whether, in direct conflict with the Third Circuit, the Ninth Circuit erred in holding that Petitioners' convictions of filing, and aiding and abetting in filing, a false statement on a corporate tax return in violation of 26 U.S.C. §§ 7206(1) and (2) were aggravated felonies involving fraud and deceit under 8 U.S.C. § 1101(a)(43)(M)(i), and Petitioners were therefore removable.
Legal scholars say a recent Supreme Court decision upholding Arizona's tax credits for scholarship donations could contain the seeds of defeat for a pending California challenge to the housing allowance enjoyed by pastors. ...
The ruling sends a signal that the Freedom From Religion Foundation (FFRF) cannot rely on Flast in its current federal challenge to ministerial housing allowances, said church law expert Richard Hammar.
Notre Dame law professor Rick Garnett agrees. He noted a separate mid-April ruling by the Seventh District Court of Appeals, which dismissed the FFRF complaint that the presidential proclamation of a National Day of Prayer amounted to government establishment of religion. The Seventh Court said that since FFRF was not directly injured, it lacked legal standing.
"The ruling suggests that the Supreme Court is not alone in thinking that Flast should not be read over-broadly," Garnett said. "It is powerful, persuasive authority for the claim that the foundation lacks standing to challenge the pastoral housing exemption."
- DOJ Press Release
- ABA Journal
- New York Law Journal
- New York Times
- Wall Street Journal
- Washington Post
Sunday, May 22, 2011
A Toronto lawyer who left Bay Street in 2006 in an abortive attempt to make it as a professional Internet poker player has failed in a bid to write off the $120,000 loss he ran up that year before slinking back to practice. Steven A. Cohen claimed he made the career switch in December 2005 after Goodmans LLP deferred a decision on elevating him to partner for a second consecutive year.
His master plan envisioned a $150,000 annual profit by targeting weak, inexperienced players in small-stakes games, before elevating in the long-term to higher stakes for a $500,000 annual return, the same level he would have made as partner at Goodmans, according to the ruling in Cohen v. The Queen. ...
But things didn’t quite go as planned, and his $80,000 in winnings for 2006 were dwarfed by the $200,000 he ploughed into the venture. ... In the May 12 ruling, Tax Court of Canada Justice Frank Pizzitelli decided Cohen’s actions did not suggest the poker venture was conducted in a business-like way, and refused Cohen’s appeal of his tax assessment which denied his bid to deduct his $120,000 losses. ... The decision also delivered a damning verdict on Cohen’s poker skills.
(Hat Tip: Francine Lipman.)
Saturday, May 21, 2011
Petitioner attended college in the early 1980s. Petitioner borrowed $19,986.72 from the Connecticut Student Loan Foundation (CSLF) in order to finance his college education. At some point petitioner became delinquent in his loan payments. In 1988 CSLF filed a complaint in the Connecticut Superior Court. Petitioner received personal service of the complaint, failed to appear at the judicial proceeding, and a default judgment was entered on May 17, 1989, for $27,655.30. ... On December 28, 2005, petitioner mailed CSLF a personal check for $45,000 to extinguish his then-outstanding liability of approximately $73,258.
In February 2006 CSLF filed documents in the Connecticut Superior Court evidencing petitioner's satisfaction of the judgment and a release of CSLF's claim against petitioner. CSLF issued a Form 1099-C, Cancellation of Debt, to petitioner for 2006 reporting income of $27,821. ...
Petitioner did not present any evidence that the basis of the agreement with CSLF to extinguish the debt for less than the full amount was based on these positions or any good-faith claim that he was not liable for some or all of the debt. On this record, we conclude petitioner did not have a good-faith dispute with respect to the indebtedness with CSLF in the amount claimed by the creditor.
It sometimes pays to check a map. The mortgage lender in this case did not, and as a result it recorded an interest in Tammy Church's property in the wrong county. Luckily for the public fisc, the IRS, which also placed a lien on Church's property, did not make the same mistake. When the lender realized what had happened, it sued, seeking in equity what it could not get in law -- a declaration that it had the superior claim to the property. Equity does not save the lender in this instance, and we therefore affirm.
Wednesday, April 13, 2011
In 2005, Bruce Brown held a life insurance contract with Northwestern Mutual Life Insurance Company. On December 18, 2005, Northwestern terminated the contract, using its entire cash value of $37,365.06 to pay policy debt. Petitioners (the Browns) did not report any gain or loss on their 2005 federal income tax return from the termination of the life insurance contract.
In a notice dated December 24, 2007, respondent (the IRS) determined a deficiency in tax of $8,553 for tax year 2005. The deficiency was the result of the IRS’s determination that Mr. Brown recognized a taxable gain of $29,093.30 on termination of the Northwestern contract. The IRS also determined that the Browns were liable for a penalty of $1,711 under § 6662. The Browns dispute those determinations. ...
Bruce Brown is a commercial litigation attorney who has been licensed since 1973. His wife, Carol Anfinson Brown, is also an attorney. She has a master of laws degree (LL.M.) in taxation. ...
Northwestern sent Mr. Brown a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The Form 1099-R showed a gross distribution of $37,365.06 and a taxable amount of $29,093.30. ... According to Northwestern’s calculations, the $29,093.30 taxable amount was equal to the policy’s cash value of $37,365.06 minus what it called “net cost” of $8,271.76. ... [W]e agree with the IRS that the Browns were required to include $29,093.30 in gross income from the termination of the Northwestern life insurance contract. ...[T]he Browns’ experience, knowledge, and education weigh against them: both are licensed attorneys, and one has a master of laws degree (LL.M.) in taxation. In short, the Browns have failed to show that they had reasonable cause for and acted in good faith regarding the underpayment. We therefore find that the IRS correctly determined that the Browns are liable for the substantial understatement penalty under § 6662(a).
(Hat Tip: Bob Kamman.)
Update: Tax Update Blog, The Perils of Too Much Education