Archive for Tax Court
Under §121, if married taxpayers own and use property as their principal residence for at least two of the five years ending on the
date of sale, they can exclude up to $500,000 of capital gain on a joint return. However, I do not believe the terms “property” and “principal residence” are not defined in the Code or regulations.
Based on legislative history, it can be concluded that Congress intended the terms “property” and “principal residence” to mean a house or other dwelling unit in which the taxpayer actually resided. For example, the sale of land alone may qualify for the exclusion if the taxpayer sells the dwelling unit within two years before or after the sale of the land.
However, the exclusion only applies if the dwelling unit the taxpayer sells was actually used as his or her principal residence for two out of five years ending on the date of sale.
It can be argued that demolishing and rebuilding a house is no different than remodeling a house based on the ambiguity in determining if there is some level of remodeling that ‘restarts’ the clock as it were in regards to occupying the property for capital gains purposes. What if you demolishes the house but not the foundation and live in a tent on the property during the construction effort? Are you remodeling or rebuilding? It can be difficult to ascertain. The best bet is to live in the house for 2 years before selling it.
Another tax treatment to consider if you demolish and rebuild, treat the original house as being sold for zero dollars when demolished with the basis of the house going to the land and apply §121 to a subsequent sale of the land and new house.
Generally severance payments made to terminated employees have been held by the US Tax Court to be FICA wages because the definition of “wages” for FICA purposes found in the Internal Revenue Code is so broad. “Wages” include all remuneration or money paid for employment with 23 listed statutory exceptions to the definition.
A federal district court case case I blogged about before, US v. Quality Stores, Inc. from the western district of Michigan provides a FICA exception for one small area of severance pay. Specifically, the federal court found a FICA exception for severance pay which constitutes “supplemental unemployment compensation benefits” within the meaning of Section 3402(o) of the Internal Revenue Code defined as amounts paid to an employee because of an employee’s involuntary separation from employment resulting directly from a reduction in work force, the discontinuance of a plan or business operation.
When you retire from employment and your separation is not the direct result of a reduction in work force or operational shut-down your retirement is usually NOT considered involuntary and as such your severance pay can be subject to FICA taxation if you have not hit the income threshold for the tax year.
Furthermore it is important to note that the IRS disagreed with the Quality Stores decision described above. On June 18, 2010, the IRS issued an opinion which refers to the Quality Stores decision by stating “the decision is not binding precedent,” and “the opinion runs counter to (a) Federal Circuit Court of Appeal’s 2008 decision.” Which means in plain terms from my perspective that the IRS will dedicate resources to defending their position on this matter the next time a case like Quality Stores comes up. In other words chances are really good that your severance payment will more likely than not be subject to FICA tax.
With mortgage rates at levels not seen in generations and the banks finally starting to lend again many people have been calling with questions about the tax implications of refinancing. It can be a little confusing and this is my best attempt at explaining it in general terms without hitting line item detail of a HUD statement.
Mortgage interest is treated separately and distinctly from mortgage fees, charges and taxes. When loan proceeds are used for business or investment the charges are generally deductible over the life of the loan under Internal Revenue Code §162(a) or §212 and include among other items:
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Overnight/courier fees
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Underwriting fees
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Credit report fees
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Appraisal fees
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Notary fees
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Escrow fees
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Title insurance fees
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Document preparation fees
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Flood certificate fees
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Modification endorsement fees
Balances not amortized are deducted when the loan is paid off.
Items such as transfer, recording, and conveyance fees are treated as the cost of acquiring the property and included in the property’s basis under §263(a)(1).
If the loan proceeds were used for personal purposes, like your primary residence, taxes and points are generally deductible on Schedule A while most fees and charges are not.
October 4, 2011
John R. Dundon II
Appeals & Audit Resolution, Basis, IRS Appeal, IRS Audit, IRS Collections, IRS Enforcement, IRS Examination, Tax Court, Tax Guidance & Preparation, Tax Problems & Requests
When you call the IRS I suggest doing it as early in the work day as possible to minimize wait time. Have a pen and pad of paper in hand and ideally be sitting in front of a computer. Write your questions down in advance of picking up the phone and be calm yet alert. Be sure to record on the top of your notes the date and time of the call.
THE VERY FIRST QUESTIONS YOU ALWAYS WANT ANSWERED:
1. Who are you talking to?
2. How is their name spelled?
3. What is their IRS identification number?
Be polite when asking but do know that the person you are talking to is obligated to provide you this minimal information. This is also particularly important because sometimes when defending against allegations it may prove beneficial to request that the actual taped phone conversation be reviewed for accuracy and without this above information the IRS will simply not comply. When the IRS provides documented misinformation they can and sometimes do create a basis for you to seek relief from their allegations.
Remember the person on the other end of the phone is obligated and trained (usually very well) to advocate on behalf of the US government. And this person is skilled at using what I refer to as phone tactics in pursuit of their obligations to their employer which manifests itself in a variety of ways and can cause you to experience a variety of emotions if you let it. Take solace in knowing that politeness and calmness usually prevail.
In the US Tax Court Case Stephen Meeh v. Commissioner - TC Memo 2009-18, the Court noted that the IRS settlement officer had a history of being unavailable and misrepresenting or failing to record the taxpayers’ efforts to contact the officer. The Court was of the opinion that both the tax payer and the IRS are partially at fault, but because the IRS records were so “badly muddled,” the appropriate action was to honor the taxpayers’ request for an installment plan.
Lesson here is to take better notes than your opponent because more often than not it distills down to who ever has the more precise and organized documentation gets a ruling more in their favor, unless of course their is an overt violation of the code.
In discussing expiration dates to the 90 day notice I rediscovered an interesting fact this morning about the difference between a post mark date and a delivery date worth researching and posting.
Generally speaking when sending in packages to the Internal Revenue Service, United States Treasury Department or United States Tax Court using a for hire courier other than the United States Postal Service, the actual delivery date recorded by the courier is used to determine if your package was timely received. Whereas if the package was sent United States Mail it is the post mark date that is used to determine if the package was timely received.
Under §7502(a) when a petition is received after the 90-day period, it will be deemed timely if the date of the U.S. Postal Service postmark on the package is stamped within the required period of time.
On the other hand, paragraph (2)(C) of §7502(f) requires that a designated delivery service “[record] electronically to its data base, kept in the regular course of its business, or mark on the cover in which any item referred to in this section is to be delivered, the date on which such item was given to such trade or business for delivery.”
So the lesson learned here I think is that if you use a means of filing other than the United States Postal Service, it is the delivery date recorded by the delivery service that determines whether your petition is timely filed, NOT necessarily the date the package was given to the courier. If there is a question as statutory expiration date and you think it is today, get your package post marked by US Mail today.
Back from vacation! Nashville, TN! Awesome town!
In reviewing Paul T. Banach v. Commissioner - TC Memo 2010-33 – I learned that payments may be claimed as alimony under §215 if all four requirements of §71(b)(12) are met. Payment in cash will be considered alimony only if the:
(1) payment is received by (or on behalf of) a spouse under a divorce or separation agreement;
(2) agreement does not designate the payment as a payment which is not included in gross income or allowable as a deduction under §215;
(3) payor and the payee are not members of the same household at the time the payment is made; and
(4) liability to make the payment ends for any period after the death of the payee.
All of the above requirements except the fourth were met in this particular case. As a result the Tax Court looked to Florida state (taxpayer’s home state) law which basically says a lump sum alimony payment does not terminate with the death of the recipient. Subsequently Paul was denied a deduction for the lump sum alimony payments he made to Deborah in 2006, but the accuracy related penalty was abated.
Here are my notes on reviewing Wendy W. Bozick v. Commissioner
TC Memo 2010-61 regarding innocent spouse relief.
The issues of disagreement are whether Wendy:
• Knew her husband would not pay the tax liability.
• Will suffer economic hardship if she is not relieved of the joint tax liability.
• Benefited from the failure to pay the 2003 income tax.
• Made a good faith effort to comply with the income tax laws.
When Wendy’s husband Gary died in 2006, Wendy received a $750,000 proceed from his life insurance policy. She also smartly filed a Form 8857, Request For Innocent Spouse Relief, in February 2007 asking for relief from the 2003 joint tax liability. In July 2007, the IRS sent Wendy a letter denying her request. The IRS stated she did not qualify for relief under §6015(f). In the summer of 2008, the IRS seized Gary’s 401(k) account of $145,000 to pay the 2003 joint tax liability. That hurt.
Two factors support relief for Wendy, her marital status and her lack of significant benefit. Since Gary (husband) was dead at the time the IRS made its innocent spouse determination, the marital status factor weighs in favor of granting relief. Wendy did not receive significant benefit for not paying the 2003 income tax liability. This factor weighs in favor of relief. The additional factor that she was browbeaten by her husband to sign the joint return without being allowed to examine the return weighed heavily in her favor as well. So although she had reason to know the 2003 income tax liability would go unpaid, the Court found relief was in order.
July 29, 2011
John R. Dundon II
Abusive Tax Shelter, Entity Classification, Self Employ, Small Business, Sole Proprietor, Sub-chapter S, Tax Abuse, Tax Court, Tax Fraud, Tax Guidance & Preparation
To be taxed as an S corporation, a C corporation must elect S status by filing IRS Form 2553. Electing S status is fairly simple for a new or existing corporation, but meeting the requirements for S status can be more complex when the C corporation is not owned by an individual. Eligibility is based on §1361, which states only a “small business corporation” can obtain S status to be taxed as an S corporation. Under Reg. §1.1361-1(e) (1) the person for whom stock is held by a nominee, guardian, custodian or an agent is considered to be the shareholder of the corporation.
In Taproot Administrative Services, Inc. v. Commissioner the IRS disallowed the S election on the basis that an IRA is not an eligible shareholder. They based their opinion on Rev. Rul. 92-73, which disallowed an IRA as a shareholder, stating the code does not specifically address an IRA as a shareholder in an S corporation. Rev. Rul. 92-73 was based on the fact that a beneficiary of an IRA or Roth IRA is not taxed on current income for the year, but taxed when the money is distributed. Trusts allowed to own stocks in an S corporation are taxed currently either at the trust level or the beneficiary level, and are therefore eligible shareholders of an S corporation.
Taxation of IRAs are governed under §408 and §408A, which allow the owners or beneficiaries of an IRA to defer any tax or gain until the amounts are distributed. IRAs are taxed on unrelated business income under §511 where income from an S corporation would be unrelated income for the exempt account.
The Court upheld the IRS’ position regarding Rev. Rul. 92-73, stating IRAs cannot be the owners of S corporation stock because the beneficiaries are not currently taxed on the S corporation’s income, and Congress did not include IRAs in §1361 as eligible S corporation shareholders.
