This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses a recent Tax Court decision denying limited partner status to law firm partners.
Law firm partners find the limits of “limited.”
In the beginning, there were general partnerships and limited partnerships.
But the lawyers came down and said, “Come, let us go down and confuse their language so they will not understand each other.” Thus LLCs, LLP, LLLPs, PLCs, PLLCs, and so forth were loosed upon the firmament.
But the IRS self-employment tax regulations, in their wisdom, ignored this, and continued to speak only of general partnerships and limited partnerships. And thus a Mississippi law firm ended up in Tax Court.
In the simple world of the old regulations, general partners in a service firm pay self employment tax on all of their K-1 income, and limited partners don’t. The Mississippi law firm practiced as a “PLLC,” short for “professional limited liability company.” Under the tax law, it was treated as a partnership. The “limited liability” thing makes it sound like a limited partnership. On the advice of their tax preparer, they treated their “guaranteed payments” — what non-partners call wages and bonuses — as self-employment income, and their residual income on their K-1s as income not subject to self-employment tax. According the Tax Court opinion, “the guaranteed payments were commensurate with local legal salaries as determined by a survey of legal salaries in the area.”
The IRS didn’t care for this and said all of the K-1 income was “general partner” income. It fell to Tax Court Judge Paris to apply self-employment tax rules from a simpler past to the complex present. She reviewed the Mississippi law governing partnerships looking for talismans to determine whether the lawyers were “limited partners” of their firm. She ultimately decided that control of the business was a key factor, and that factor made them “general” partners under the self-employment tax rules:
The PLLC had no written operating agreement, nor is there any evidence to show that any member’s management power was limited in any way. Furthermore, all members participated in control of the PLLC: For example, they all participated in collectively making decisions regarding their distributive shares, borrowing money, hiring, firing, and rate of pay for employees. They each supervised associate attorneys and signed checks for the PLLC. On the basis of the foregoing facts, the respective interests… could not have been limited partnership interests under any of the limited partnership acts. Therefore, they were not limited partners under section 1402(a)(13).
Because there must be at least one partner who is in control of the business, there must be at least one general partner. The members testified that all members participated equally in all decisions and had substantially identical relationships with the PLLC. There was no PLLC operating agreement or other evidence to suggest otherwise. But since by necessity at least one of the members must have occupied a role analogous to that of a general partner in a limited partnership, and because all of the members had the same rights and responsibilities, they must all have had positions analogous to those of general partners in a limited partnership.
Decision for IRS. Wisely, Jude Paris declined to assert penalties, finding reasonable reliance on an experienced professional for the lawyers’ filing position.
The moral? It’s hard for a service firm to be a limited partnership. If you want to limit self-employment tax exposure in such a setup, you will need to identify at least one “general” partner to bear that burden, and you will need to document your operating agreement to support that contention. Or you can just become an S corporation, pay reasonable salaries, and get to the same place with more confidence.
Cite: Castigliola v. Commissioner, T.C. Memo 2016-62 (Apr. 12, 2017)
Monday, April 10, 2017
Howard Gleckman, The White House’s (Very Brief) Flirtation With A Market-Based Solution To Climate Change (TaxVox):
For a brief shining moment the other day, it looked as if the Trump Administration was considering a carbon tax. Combined with its aggressive effort to roll back clean air regulations, this might have created a striking—and potentially positive response—to climate change. In effect, the White House could have taken the lead in using market prices, instead of complex regulation, to reduce demand for fossil fuels.
More than that, a carbon tax might have also jump-started floundering efforts to reform the tax code…
Or course, it was all too good to be true. The idea was leaked to a couple of Washington Post reporters, who dutifully ran it up the policy flagpole. Within hours, just a whisper of a rumor generated a cacophony of outrage, and, as these things usually go, the White House denied that it had ever seriously considered such a heretical idea.
A carbon tax might work, but only combined with elimination of other taxes, like the corporation income tax. So it won’t work.
Jared Walczak, Late-Breaking West Virginia Compromise Would Create Two New Taxes (Tax Policy Blog). “Those who think the legislative process is boring haven’t been watching the drama that has been unfolding in West Virginia in recent days, offering more than its share of suspenseful plot twists.” I’m sure any Iowa tax reform effort will bring the unexpected too.
Jason Dinesen, Why Does Iowa Make You Add Federal Self-Employment Tax to Income?
Kay Bell, Savings bonds’ tax advantages and as a refund option. “First, Series EE savings bonds are exempt from state and local income taxes.”
Kristine Tidgren, Summary Judgment Narrows Issues for First Syngenta Trial (Ag Docket)
Leslie Book, Some More (Depressing) Weekend Tax Reading: IRS in Crosshairs for Violating Rights in Anti-Structuring Investigations (Procedurally Taxing). “In a widely publicized report TIGTA this week discussed how IRS enforcement of the Bank Secrecy Act’s anti-structuring provisions often violated the fundamental rights of small business owners who obtained money legally but who IRS suspected were structuring transactions to violate the reporting requirements that accompany certain deposits and transfers of cash.”
Lew Taishoff, DE NOVO MEANS DE NOVO. “Or as a much finer writer than I put it, ‘A lawyer is not to tell what he knows to be a lie: he is not to produce what he knows to be a false deed; but he is not to usurp the province of the jury and of the judge, and determine what shall be the effect of evidence—what shall be the result of legal argument.'”
Richard Phillips, How to Shut Down Offshore Corporate Tax Avoidance, Full Stop (Tax Justice Blog)
Robert Wood, Jersey Shore’s Mike ‘The Situation’ Sorrentino Indicted On More Tax Evasion Charges. “These are just allegations, but they are serious.”
Roger McEowen, The Application of the Endangered Species Act to Activities on Private Land. “Approximately 90 percent of endangered species have some habitat on private land, with almost 70 percent of the endangered or threatened species having over 60 percent of their total habitat on nonfederal lands.”
Russ Fox, Bozo Tax Tip #5: The $0.49 Solution. “If you use the Postal Service to mail your tax returns, spend the extra money for certified mail.”
TaxGrrrl, Taxes From A To Z (2017): R Is For Rounding Off:
I’ve advised before that you shouldn’t guess or estimate your income and expenses: all of those perfect numbers can be an audit trigger (more audit flags here).
That said, you can round numbers on a tax return, but round to the nearest dollar, not to the nearest hundred or thousand.
TaxProf, WSJ: Companies Offer Free Tax Preparation So They Can Harvest And Monetize Your Personal Data. Not this company.
Tuesday, April 11, 2017
Ten years ago today I posted an item that I think has held up well: HAROLD HILL GULLS THE HOUSE:
Like rubes rushing the patent medicine wagon, the Iowa House almost unanimously voted for a rich special interest giveaway for the film industry yesterday. By a 95-1 margin the House approved HF 892 to provide a 50% subsidy to film projects, and then some:
– A 25% transferable tax credit for expenditures on a film project;
– A 25% credit for investors in film projects; and
– a tax exemption for sales of goods and services to film projects.
Because the credits are transferable, the filmmakers can sell them to finance their projects. This feature makes this tax credit a subsidy, rather than just a tax break.
If it weren’t tax season, I would spend more time pointing out just how absurd this thing is. Why is this one industry – an itinerant one that leaves nothing behind but empty fast food wrappers – somehow worthy of being subsidized by every other business? The standard line about how much the filmmakers bring to the economy can be said about any business – more so, in fact, about the ones that stay here and provide permanent jobs, and who end up paying for this subsidy.
A puff piece for the bill in the local business paper says:
Supporters point out that the tax incentives do not take funds from the state, but rather lower the amount of taxes producers and investors pay.
Nonsense. From a business and accounting standpoint, this is delusional. It’s like telling a businessman that if he doesn’t collect his outstanding business receivables, he doesn’t really lose anything. The state is out the money as surely as if it wrote a check, and the rest of us have to pay that much more to make up the difference.
The film credit collapsed two years later in scandal, with an audit determining that 80% of the credits claimed were improper.
The film credit is dead, but Iowa still gives out hundreds of millions of dollars annually in economic development tax credits. At least some legislators are beginning to realize that tax credit blank checks might not be such a hot idea.
Caleb Newquist, The 20% of Americans Who Would Get an ‘IRS’ Tattoo to Never Pay Taxes Are Getting Off Too Easy (Going Concern)
Howard Gleckman, Is The Public Ready To Get On Board Tax Reform? Not So Much. (TaxVox):
Chris Faricy, a political scientist at the Maxwell School at Syracuse University, studies the public’s knowledge and attitudes about taxes. In his own recent surveys, he’s found that people significantly overestimate the amount of tax middle- and low-income households pay in federal taxes. For example, they think that middle-income households pay 30 percent of their income in federal taxes, more than twice the actual share of 13.4 percent. And they believe low-income households pay an effective federal tax rate of 15 percent, four times their actual rate of 3.5 percent.
See Bryan Caplan, The Myth of the Rational Voter.
Jason Dinesen, Glossary: Sole Proprietorship. “In simple terms, a sole proprietorship refers to a business which is not incorporated and which has only one owner.”
Jim Maule, If Users Don’t Pay, Who Should? “To me, it’s simple. You use the road, you pay.”
Kay Bell, Don’t itemize? Don’t worry. Above-the-line deductions can help reduce your tax bill. But not all of them work for Iowa this year.
Keith Fogg, The Interplay of Restitution and Deficiency Assessments (Procedurally Taxing). “The Court carefully explains the difference between the restitution assessment and the proposed deficiency assessment.”
Lew Taishoff, THE BUY IN. “In the world of Sub S Corp stock basis-building, taking on corporate debt builds a stockholder’s basis. But the stockholder must prove s/he is truly the primary obligor, to whom the lender looked at inception of the debt.”
Robert Wood, IRS Unleashes Private Collection Agencies To Chase Tax Debts. “The IRS reminds taxpayers to be on the lookout for scammers posing as private collection firms.”
Russ Fox, Bozo Tax Tip #4: Procrastinate!
Sam Brunson, Neil Gorsuch and the Tax Law (Surly Subgroup) “I mean, two decisions, both of which deal with relatively frivolous complaints, doesn’t give us any kind of insight into his philosophy of tax. It does tell us, though, that he views the tax law as a legitimate body of law, and that he sees frivolous tax arguments for what they are. And that’s not nothing.”
TaxGrrrl, Taxes From A To Z (2017): S is for Simplified Option for the Home Office Deduction
TaxProf, The IRS Scandal, Day 1433: House Oversight Committee Republicans Call On President Trump To Fire Commissioner Koskinen.
Wednesday, April 12, 2017
Caleb Newquist, The 20% of Americans Who Would Get an ‘IRS’ Tattoo to Never Pay Taxes Are Getting Off Too Easy (Going Concern)
Darell Granahan, What a New IRS Change to Form 1098-T Means for Colleges and Students (Thomson Reuters Tax and Accounting Blog). “Relatedly, the IRS has added a checkbox in the Students Taxpayer box on Copy A of the form. By checking this box, the university certifies, under penalty of perjury, that it has followed the TIN solicitation rules and to the best of its knowledge the information is correct. This is a substantial risk.”
Jared Walczak, An Outline of Nebraska’s Tax Reform Package (Tax Policy Blog):
Here’s what the rate changes would look like once fully phased in (and remember, I’m not including inflation-indexing on bracket widths here):
Nebraska’s current top marginal income tax rate is above the national average and stands out regionally. Two neighboring states—South Dakota and Wyoming—forego individual income taxes altogether, while another (Colorado) imposes a single-rate income tax. Iowa, Kansas, and Missouri all impose graduated-rate taxes like Nebraska, but only Iowa imposes a higher top marginal rate (8.98 percent), and the burden of Iowa’s high rate is mitigated somewhat by the state’s atypical allowance of a deduction for federal income taxes paid. One of the last states to even impose an individual income tax, Nebraska now imposes one of the highest rates in the region. The phase-down under LB 461 would bring the state more in line with its regional competitors.
The bill would also cut corporate rates to 5.99% while closing down some tax credit incentives.
The bill isn’t perfect, but it’s an improvement, and it would set up a system that would be much more attractive to business than Iowa’s D- business tax climate.
Jim Maule, Who Is It That Is Making You Do This? “Yes, it is Congress that enacts the tax laws. It is Congress that determines what is and is not deductible. It is Congress that establishes tax rates. It is Congress that requires taxpayers to file tax returns. It is Congress that establishes credits. And it is Congress that does such a wonderful job of fooling Americans into thinking that the Internal Revenue Service is responsible for these things.”
Kay Bell, Maximizing your itemized tax deductions. “If, however, you live in one of the seven states without an income tax — that’s Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming — or your state income tax is low, you’ll want to deduct instead your state and local sales taxes.”
Keith Fogg, Continued Developments in Taxpayer attempts to Litigate the Merits of Taxes in Collection Due Process Cases (Procedurally Taxing). "If I am right, perhaps taxpayers should not engage in the penalty abatement process immediately after filing a late return but wait until the CDP process begins.”
Kristine Tidgren, GIPSA Again Delays Farmer Fair Practices Rule (AgDocket)
Lew Taishoff, A JURISDICTIONAL PRIMER. “And once again, Congress has created a court that does everything but provide cheap and expeditious relief.”
Megan McArdle, Don’t Mess Around With Government Pensions:
I favor a conservative approach, and I mean “conservative” in the accounting, rather than the political sense. To err on the side of caution. And why should we be cautious? So we can make darned sure that workers get what they’re owed.
Sgouros agrees, in fact, that such conservative standards are the correct approach for valuing private-sector pension contributions, in case the business goes bust and the pension needs to stand on its own. But he says that governments are different, because they can’t go out of business. In other words, government pensions are less risky, so they don’t need such strict standards.
First, on this anniversary of the start of the Civil War, ponder the ability to collect on that Army of Northern Virginia defined benefit plan. Or, for that matter, the Imperial Russian defined benefit plan, the East Germany plan… you get the idea.
Second, math is math. Even if a government doesn’t go out of business — and they do — if you don’t fund your pensions conservatively, you find that paying off your pensioners from the old days keeps you from doing the things the government is supposed to do today. See Exhibit A, Illinois.
I believe that government defined benefit plans are lies. Either the employee is being lied to about the safety of their benefit, or the taxpayer is being lied to about the cost of current government services. The states can’t move to the private sector defined contribution model soon enough.
Peter Reilly, Mixing Penny Stock With New Cryptocurrency Does Really Not Improve Either. Dang.
Robert Goulder, French Lessons on Tax Reform: The Bad, the Worse, and the Bizarre (Tax Analysts Blog). “It gets worse. Mélenchon wants to increase the top marginal tax rate on individuals to 100 percent of their earnings. You read that correctly — a 100 percent tax bracket… I’ve never taken the Laffer Curve seriously, but in the case of a 100 percent marginal rate, one might start to ponder whether the ripple effects include disincentives to work and invest.” Gee, you think?
Robert Wood, More Wells Fargo Pay Clawbacks Over Fake Accounts Bring Tax Pain. “In general, the IRS doesn’t allow you to undo a prior transaction as if it never occurred.”
Russ Fox, Bozo Tax Tip #3: Let Your IRS Notice Age Like Fine Wine! “My brother tells me that some of the best wine he’s tasted have been old varietals. I can tell you that I’ve never seen a tax notice get better with age.”
TaxGrrrl, Financial Spring Cleaning: Tips For Storing Your Financial Records. “When you’re ready to toss your old records, don’t simply throw them into a recycling or trash bin.”
TaxProf, The IRS Scandal, Day 1434: How To Prevent The Next IRS Targeting Scandal.
Thursday, April 13, 2017
Celebrity News from the Profession. BDO Auditor Had Starring Role in ‘The Spy Who Bought Me Coffee’ (Adrienne Gonzalez, Going Concern). “This is some serious back page of the comic book spy stuff here you guys.”
David Brunori, Amazon May Be the End of Quill (Thomson Reuters Tax & Accounting Blog):
Most of us spent our entire professional lives in a world dominated by Quill and the physical presence test. The remote sales debate was all encumbering. Maybe that world is coming to an end. Amazon.com has announced that it is collecting sales tax in every state. For the sales tax purists out there, this is very good news. The sales tax should be paid on all final consumption. But we know that if the vendor is not collecting, the customer is not paying. The significance of Amazon collecting everywhere it sells should not be lost on anyone.
Even without being formally overturned, Quill is fading away. More and more remote sellers will be collecting sales tax. But brick and mortar will never regain its old dominance, for reasons having nothing to do with sales taxes.
Kay Bell, Last-minute IRA contributions could mean a tax win-win-win. “If you haven’t opened or contributed to an IRA for 2016 yet, the deadline is almost here. Get to it!”
Leslie Book, S Corp Shareholders Unable to Deduct Losses As Guarantee Does Not Create Basis (Procedurally Taxing). “Philips is a good reminder that form matters, especially when using S Corps (a lesson we also explored in Financial Consultant Fails To Avoid Self-Employment Tax With S Corp Structure) and shareholders seeking to ensure basis to offset losses should structure the transaction in the form of a direct loan to the shareholder, followed by a shareholder loan or contribution to capital.”
Meg Wiehe, State Rundown 4/12: Season in Transition as Some States Close, Others Open Tax Debates (Tax Justice Blog). “This week in state tax news we see Louisiana’s session getting started, budgets passed in New York and West Virginia, Kansas lawmakers taking a rest after defeating a harmful flat tax proposal, and Nebraska legislators preparing for full debate on major tax cuts.”
Mike Feehan, What does “across state lines” really mean? (InsureBlog). “My suggestion: modify federal law to require that the coverage in ANY policy approved in ANY state, be available for purchase in EVERY state. This WOULD require the states abandon their monopolistic mandate regulations.”
Robert Wood, Tax Time Travel Ban: IRS Can Take Your Passport. As if there weren’t enough ways for IRS mistakes to mess with you.
Roger McEowen, For Depreciation Purposes, What Does Placed in Service Mean?
An asset is placed in service for depreciation purposes when it is ready and available for use in the taxpayer’s trade or business. The Stine case makes that clear. It’s an issue that comes up in agriculture also. Just think back to the end of the year promotional ads that have appeared on TV and in farm magazines in recent years stating that a contract could be signed or delivery be taken before year end for a business asset to be depreciable. That’s not correct. While the asset need not be “used” by the taxpayer to be placed in service, it still has to be ready and available for use. Merely signing a contract or taking delivery of parts and materials that have to be assembled is not enough.
So if the parts for the new machine are on site at year-end, but still in the packing crate, no depreciation or Sec. 179.
Russ Fox, Bozo Tax Tip #2: Cash Isn’t Taxable. “But if you want to live on the Bozo side of life, skip reporting the cash…until one day you find out that really was a Bozo move.”
Shu-Yi Oei, The Games We Play (Surly Subgroup). “Anyway, I was feeling grumpy about not having cool tax games to call our own but then I went hunting around and realized, WAIT, we do have tax games! Whether they’re cool or not is another story.”
TaxGrrrl, Financial Spring Cleaning: What To Keep & What To Toss After Tax Day
TaxProf, The IRS Scandal, Day 1435: House GOP Tax Writer Ask Attorney General Sessions To Reopen Criminal Investigation Of Lois Lerner. With Commissioner Koskinen still in the saddle, it seems that the new administration may think a politicized tax agency could be useful.
Friday, April 14, 2017
Annette Nellen, Tax complexity and filing status. “It doesn’t seem that one’s filing status should be confusing. You’re single or you’re married. But, many people qualify for head-of-household status. That one is confusing because of its multi-faceted definition.”
Hank Stern, 1035in’ along (InsureBlog). Hank explains how a policy swap can help you out of a bad life policy without a tax hit.
Howard Gleckman, President Trump’s Ever-Evolving Views On International Taxes (TaxVox). “What exactly is Trump talking about? It is simply not possible to know.”
Jack Townsend, DOJ Tax Encourages Taxpayer to Avoid Willful Violation of the Tax Law. “For those who have previously filed returns that may be questionable, a superseding return can be filed by the filing deadline that will be treated as the return against which liability for civil and criminal penalties is tested. So, the prudent thing to do with respect to a questionable tax return filed early is to file a new return by the filing deadline correcting the problems.”
Joseph Thorndike, Why is Tax Day Usually April 15? (Tax Analysts Blog, my emphasis):
The March 15 filing deadline remained on the books for a long time. Not until 1955 did taxpayers face a new deadline. The Internal Revenue Code of 1954 established April 15 as the tax day we all know and loathe.
According to lawmakers, the new date was all about helping taxpayers. Americans needed extra time to cope with all the extra complexity creeping into the tax law. According to House Ways and Means Committee Chair Daniel A. Reed, the later deadline would also ease the burden on harried accountants and other return preparers.
Reed acknowledged, however, that the IRS also stood to benefit from the extra month. The agency’s peak workload would be spread over a longer period of time, resulting in “more efficient and economical administration and better service to our taxpayers,” he noted.
If the extension moved further from year-end in proportion to increased complexity since 1950, we’d have until sometime in 2019 to finish our 2016 1040s.
Kay Bell, FBAR filing now due in April + more on foreign accounts & issues facing taxpayers abroad. “But FinCEN will grant filers missing the April 18 deadline an automatic extension until Oct. 16 to submit their FBARs. You don’t have to make a specific extension requests are not required.”
Keith Fogg, When Can the IRS Reassess After Abatement (Procedurally Taxing). “The guidance concludes that the normal three year statute of limitations for assessment does not apply to the addition to tax imposed in 6651(a)(2) and, therefore, the IRS can reassess a failure to pay addition to tax at any time during the ten year statute of limitations for collection.”
Lew Taishoff, THE BLESSED COMMUNION, FELLOWSHIP DIVINE. “Wherefore, get a copy of Notice 2016-30, copy the list, and pin it on every wall in your office. Then you can blow your trumpets, break your empty jars and send your petitions charging into Tax Court.”
Robert Wood, IRS Can’t Tax Churches, But Fake Ones Can Trigger Tax Evasion Charges. “The interaction of taxes and religion is strange.” And no, they aren’t the same thing.
Roger McEowen, Using the Right Kind of An Entity to Reduce Self-Employment Tax. “So, how can self-employment tax be minimized when the desired structure is a limited liability company (LLC)?”
Russ Fox, Bozo Tax Tip #1: Declare More Income than You Earned! Credit fraud and earned income tax fraud are involved.
Scott Hodge, The Business Tax Relief and State-by-State Effects of the House GOP Blueprint (Tax Policy Blog). He pegs it a $7 billion benefit for Iowa businesses over 10 years.
TaxGrrrl, Taxes From A To Z (2017): V Is For Virtual Currency. ” In the Notice, the IRS specifically distinguished Bitcoin and other virtual currency from foreign currency, writing that ‘virtual currency is not treated as currency that could generate foreign currency gain or loss for US federal tax purposes.'”