Archive for Tax Court
According to the newly released 2012 IRS Data Book, the IRS collected almost $2.5 trillion in federal revenue and processed 237 million returns, of which almost 145 million were filed electronically. Out of the 146 million individual income tax returns filed, almost 81 percent were e-filed. More than 120 million individual income tax return filers received a tax refund, which totaled almost $322.7 billion. On average, the IRS spent 48 cents to collect $100 in tax revenue during the fiscal year, the lowest cost since 2008.
The IRS examined just under one percent of all tax returns filed and about one percent of all individual income tax returns during fiscal year 2012. Of the 1.5 million individual tax returns examined, nearly 54,000 resulted in additional refunds.
An electronic version of the 2012 IRS Data Book can also be found on the Tax Stats and the following are some highlights worth noting.
In FY 2012, IRS initiated 5,125 criminal investigations.
In FY 2012, the IRS closed 60,793 applications for tax-exempt status and other determinations. Of those, the IRS approved tax-exempt status for 52,615 organizations. In FY 2012, the IRS recognized more than 1.6 million tax-exempt organizations and nonexempt charitable trusts.
In Fiscal Year 2012, General Counsel received 31,295 Tax Court cases involving a taxpayer contesting an IRS determination that he or she owed additional tax.
IRS workforce and the resources that the IRS spends to collect taxes and assist taxpayers. In Fiscal Year (FY) 2012, the IRS collected more than $2.5 trillion, incurring a cost of 48 cents, on average, to collect $100.
IRS’s actual expenditures in FY 2012 was less than $12.1 billion, which was used to meet the requirements of its three core operating appropriation budget activities.
In FY 2012, the IRS employed a total workforce of 97,941, including part-time and seasonal employees.
In Loving v. IRS the IRS’ authority to regulate commercial tax return preparers has been successfully challenged. United States District Court for the District of Columbia Judge James E. Boasberg granted Loving’s motion for summary judgment describing the IRS Rules as “Ultra Vires.”
“Ultra Vires” as I understand is a legal term meaning “beyond the powers” referring to an activity that exceeds the powers granted to the person (or entity) engaging in that activity creating what the opinion calls “an invalid regulatory regime.”
As I further understand this means that tax return preparers who have not yet taken the competency test do NOT have to take it. It also means that there will be no Registered Tax Return Preparers (RTRPs) with the IRS and that the industry goes back to the way things were in 2009, before the Tax Return Preparer Initiative was launched. The wild, wild west where incompetency and fraud ran rampant. The only exception noted is that all tax return preparers still must register for and receive an annually renewable practitioner tax identification number or PTIN.
How will the IRS respond? This will be interesting to watch develop. Check out The Original Complaint.
Considering the scope of the reasonable cause language to the Code Sec. 6699 penalty for late filing of an S corporation return, the Tax Court determined that the failure to timely file a 2008 2008 1120-S tax return was due to reasonable cause not subject to penalty in Ensyc Technologies v. Comm’r, T.C. Summary 2012-55 (6/14/12). The following are the facts as I understand:
1. Ensyc Technologies, an S corporation operated entirely by its president who works from his home in Idaho with the assistance of subcontractors, had its tax returns prepared by an accountant in Nevada.
2. Ensyc’s annual tax return for 2008 was due March 16, 2009.
3. On March 10, 2009, Ensyc’s accountant sent Ensyc IRS Form 1120S, U.S. Income Tax Return for an S Corporation, to file with the IRS. The accountant also sent copies of Schedules K-1, Shareholder’s Share of Income, Deductions, Credits.
4. Ensyc’s files contained a copy of a Form 1120S bearing the President’s signature dated March 16, 2009.
5. The IRS has record receiving a Form 1120S from Ensyc on September 11, 2009 postmarked September 8, 2009.
6. The 1120-S form itself was dated February 24, 2009.
7. Code Sec. 6699 basically states that an S corporation not timely filing its annual tax return is liable for a per-shareholder penalty for every month the tax return is late up to 12 months. However the penalty is not imposed if the failure to timely file the return is due to reasonable cause.
8. On the theory that the Form 1120S it received on September 11, 2009, was the only Form 1120S Ensyc had filed for tax year 2008, the IRS assessed a $6,408 late-filing penalty.
9. On February 1, 2010, Ensyc requested a collection-review hearing with the Office of Appeals regarding levy action.
10. The IRS Office of Appeals determined that Ensyc did not timely file a Form 1120S nor did it have reasonable cause for failing to timely file the form and sustained the levy.
11. Ensyc took the case to the Tax Court, arguing that it was not liable for the late-filing penalty because it mailed a Form 1120S on March 16, 2009.
12. The Tax Court examined the possible explanations for why the IRS had no record of receiving the Form 1120S and essentially determined that the tax return was not timely mailed.
13. The Tax Court then considered whether there was reasonable cause for not filing the form on time noting that no judicial opinion had yet considered the scope of the reasonable cause exception to the Code Sec. 6699 penalty.
14. The court applied the ordinary-business-care-and-prudence test from IRC 6651 concluding that Ensyc exercised ordinary business care and prudence in its efforts to timely file its Form 1120S for 2008.
15. The Tax Court specifically noted that the President routinely mailed Ensyc’s tax returns on time. Further he mailed the Schedules K-1 to Ensyc’s shareholders and that an Ensyc shareholder filed an annual individual income-tax return on April 15, 2009 reflecting the shareholder’s pass through loss.
16. The court believed the President’s testimony that he thought he had mailed the 2008 Form 1120S on March 16, 2009. As a result, the court found that Ensyc’s failure to timely file a Form 1120S for the 2008 tax year was due to reasonable cause and, thus, Ensyc was not liable for the Code Sec. 6699 penalty.
17. It was also noted that pursuant to INTERNAL REVENUE CODE SECTION 7463(b), this opinion may not be treated as precedent for any other case.
I think the lesson learned here is to file on time and avoid the penalty.
Generally, the IRS has a three year statute to audit a return. However this changes to six years if there is a substantial understatement of income, when 25% of more of gross income is omitted. The definition of what it means to omit gross income is often up for debate as shown by numerous tax court cases.
In a recent court case, United States v. Home Concrete & Supply, the Supreme Court decided that despite overstated basis, the IRS can only audit the last three years.
This blog is my personal tax research tool. Pursuant to the rules of professional conduct set forth in US Treasury Circular 230 nothing contained in this blog was intended to be used by any taxpayer for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
This post is a brief review of Amerisouth XXXII, Ltd. v. Comm’r, T.C. Memo. 2012-67 (3/12/12) in which most of the increased depreciation deductions for an apartment complex, resulting from a cost segregation study, were denied. These are some of the facts of the case as I understand:
1. AmeriSouth hired a consulting firm to do a cost-segregation study.
2. The consulting firm calculated that about $3.4 million of AmeriSouth’s property could be depreciated over five or 15 years instead of 27.5 years.
3. AmeriSouth claimed on its tax returns that the water-distribution and sanitary sewer systems, the gas lines, and the electric wiring were eligible for 15-year depreciation.
4. AmeriSouth also claimed items of property in the other categories were eligible for five-year depreciation.
5. AmeriSouth’s depreciation deduction was increased by approximately $397,000 in 2003, $640,000 in 2004, and $375,000 in 2005.
The interesting point about this case for me is that the Tax Court could have dismissed the case but didn’t and it just seems to me that AmeriSouth could have prevailed with respect to many items had it actually gave a crap and presented evidence in court. However, AmeriSouth sold the investment property in question referred to as Garden House and stopped responding to the Tax Court or the IRS. So in my opinion there was probably something else really screwed up going on with the management of this company. Either way if you are going to have the gumption to push the envelope in regards to cost segregation depreciation be sure to plan (a.k.a. budget) for the inevitability of defending yourself against IRS allegations of misconduct.
Technically in regards to cost segregation depreciation the most important thing I learned is that the Tax Court ruled in favor of AmeriSouth on two items:
1. The clothes-dryer vents serve specific equipment, the clothes dryers. Evidently because the vents extend directly from the dryers to the outside of the building and have no connection to the apartments’ general ventilation system the vents were deemed properly classified as tangible personal property and not residential real property subject to a 27.5 year life.
2. The other interesting point was that duplex electrical outlets situated four-feet above the ground in kitchen areas was for the purpose of plugging in refrigerators, which are personal property. The interesting distinction noted by the tax court is the relationship of a component such as a refrigerator to the operation or maintenance of a building. When an item relates to a specific piece of equipment it is not a structural component of the building. So those duplex outlets were deemed tangible personal property, eligible for increased depreciation deductions.
According to Cary A. Nievinski v. Commissioner TC Summary Opinion 2011-10 even though IRS Form 5405 and IRS Publication 4819 provide only general instructions and do not address all the rules and limitations applicable to the first-time home buyer credit, the apparent failure of some IRS publications to explain the “no-purchase-from-family” limitation of the first-time home buyer credit has no effect on the authority of §36(c). Failure to understand this does not provide a legal basis to allow you to claim the first time home buyer tax credit.
You are allowed deductions for ordinary and necessary expenses incurred in the course of business under §162, but you must also keep adequate records to substantiate expenses which can at times seem esoteric if not convoluted. Deductible travel expenses for example under §274(d) are based on whether or not the travel relates to a business activity or is for pleasure, while §162(a)(2) specifically states the amounts cannot be lavish or extravagant under the circumstances.
No single factor or set of factors can determine if you are engaged in a business activity for profit, but all facts and circumstances must be taken into account §183-2(b). Three common questions are considered when determining whether or not the activity is for profit or a hobby subject to the hobby loss rules under §183.
• Did you conduct the activity in a manner similar to comparable activities that are profitable?
• Did you maintain complete and accurate books and records for the activity?
• Did you change operating procedures, adopt new techniques or abandon unprofitable methods to ensure profitability of the activity?
According to Douglas Rundlett, et ux. v. Commissioner TC Memo 2011-22, even though you may conducted an activity in a businesslike manner you should also demonstrate that you adopt new techniques or strategies to limit future losses or risk being viewed as being engaged in a not for profit activity or hobby.