Archive for Tax Court

It has been QUITE a tax season! A Review of IRS Activity

April 18, 2013 IRS Appeal, IRS Audit, IRS Centralized Insolvency, IRS Collections, IRS Criminal Enforcement, IRS Enforcement, IRS Examination, IRS Levy, IRS Lien, IRS Mediation, IRS Penalties, IRS Penalty and Interest Abatement, Tax Court, Tax Fraud, Tax Guidance & Preparation

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.

No comments , ,

Trafficking under IRC § 280E

February 9, 2013 Appeals & Audit Resolution, Asset Classification, Business Expense, Cash Transaction, COGS, IRS Mediation, Marijuana, Net Operating Loss, NOL, Tax Abuse, Tax Court, Tax Guidance & Preparation, Tax Problems & Requests

The Internal Revenue Code is a complex beast.  In the lunacy of it all I’ve been asked to define ‘trafficking’ as it relates to 26 USC § 280E – Expenditures in connection with the illegal sale of drugs which states as follows:

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

As I understand the Controlled Substance Act the word trafficking is more often than not used in conjunction with the word ‘illicit’ as in nefarious or illegal.  This begs the very question as to whether the cultivating, possessing and distributing of marijuana in a state (Colorado) where the substance is fully legal under state law rises to the threshold of trafficking as it is used in the Controlled Substances Act.

Naturally the laws of interstate commerce should in my opinion generally prevail.  If however marijuana does not cross state borders then in my humble layman’s opinion the federal government in theory under our constitution has no basis for intervention.  Of course you will always find the pundits from the other side pontificating the evils of the drug as they swirl down their martinis and pop their pills but let’s not get into name calling.

When it comes to the IRS, the Service is obligated to enforce the letter of the federal law.  Marijuana is federally illegal and if taxpayers are in the business of cultivating it and distributing it for profit or otherwise then the argument goes they are by the letter of the federal law guilty of ‘trafficking’ in a controlled substance regardless of state law.

Presently and with all due respect the IRS seems to be lacking a standard of enforcement over dispensaries, cultivators and bakeries in these regards.  The recent court case of Olive v. Commissioner seems to make the efficacy of a dispensary’s income tax return achieve an allowable threshold when Cost of Goods sold are allowed as offsets to gross receipts but general business expenses are disallowed. This attempt at a standard is overtly far reaching in that the intent of IRC 280E as it pertains to the Controlled Substances Act was to curtail illicit activity.  If the activity is not illicit by state law then moving it around inside that state’s border should by default be transportation not trafficking.

It is my personal opinion that moving a fully legal product inside a state border is NOT ILLICIT NOR IS IT TRAFFICKING. If the substance is fully legal by state law than possessing it, cultivating it and even distributing it in no way reaches the threshold of ‘illicit activity’.

Until further tax court cases help iron out a standard I believe a reasonable solution is to narrowly define ‘trafficking’ under IRC 280E as a transaction where marijuana dispensary employee ‘X’ hands a product containing marijuana to a customer and the customer in turn hands employee ‘X’ money for the marijuana product.  In this limited time and space a transaction happens that could be argued to be perceived as trafficking and as such the expenses associated with that limited transaction should perhaps not be deductible under 280E of the Internal Revenue Code.

When trafficking is narrowly defined all other costs should by default in theory become legitimate business expenses be they general and administrative or cost of goods sold. This is just one simple man’s opinion and the Service presently has a vastly different opinion.  There is a middle ground somewhere and it appears the courts will have to find it for us. Because like it or not this is a growth industry. Tread lightly.  Stay tuned…

 

Pursuant to the requirements related to practice before the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of:  Avoiding penalties imposed under the United States Internal Revenue Code, or Promoting or recommending to another person any tax-related matter

No comments , , , , , , ,

Loving v. IRS deals blow to IRS Regulation of Tax Return Preparers

January 21, 2013 Enrolled Agent, IRS Enforcement, PTIN, Tax Abuse, Tax Court, Tax Fraud, Tax Guidance & Preparation, Tax Preparer, Tax Problems & Requests, Tax Whistle Blower, Taxpayer Advocate

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.

 

No comments ,

S Corp Late Filing Penalty Excused IRC 6699 Ensyc Technologies v. Commissioner

December 18, 2012 IRS Collections, IRS Enforcement, IRS Penalties, IRS Penalty and Interest Abatement, Penalty, Small Business, Sub-chapter S, Tax Court, Tax Guidance & Preparation, Tax Relief

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.

No comments , , ,

IRS Can Levy More Than 15% of Social Security Benefits According to Bowers V. US

December 4, 2012 Back Taxes Owed, Income, Intent To Levy, Intent To Lien, IRS Centralized Insolvency, IRS Collections, IRS Enforcement, IRS Levy, IRS Lien, Social Security, Social Security Tax, Tax Court, Uncertain Tax Position

The distinction of how this is possible distills down to understanding the nuanced difference between a ‘Continuous’ and a ‘One Time’ IRS tax levy.

Under Code Sec. 6331(h) once a tax levy is approved, the effect of the levy on specified payments received by a taxpayer is continuous from the date the levy is first made until the levy is released. A continuous levy attaches to up to 15 percent of any specified payment including social security payments.

However as a one-time levy, the 15 percent cap on continuing levies under Code Sec. 6331(h) does not apply to monthly social security benefits allowing the IRS to take more than 50 percent of the taxpayer’s monthly benefit in Bowers v. U.S., 2012 PTC 133 (C.D. Ill. 5/22/12).

In the Bowers case we learn that according to the court, the IRS has discretion to approve continuous levies under either Code Sec. 6331(a) or (h) however it is not required to attach a continuous levy even where the type of property might be eligible for one.

The court stated in this case that social security payments represented a present, vested right to receive benefits in fixed monthly payments for the taxpayer’s life and the amount of the benefits are based upon a formula that included prior wages.

Because the social security benefits were not contingent on the performance of any additional services the tax levy could attach to the entire stream of Social Security payments as a one-time levy under Code Sec. 6331(a) and (b). Thus, the levy was considered a one-time levy.

As a one-time levy, the 15 percent cap on continuing levies under Code Sec. 6331(h) does not necessarily apply.

I think the lesson learned here is that if you are having your social security levied try to have it levied under IRC 6331(h) as a continuous levy subject to the 15% maximum threshold..

No comments , ,

Are You A Trader or an Investor? Van Der Lee v. Commissioner TC Memo 2011-234

November 29, 2012 Basis, Business Expense, Business Income, Capital Gain, Capital Loss, Cost Basis, Deductible Expense, Mark to Market, Net Operating Loss, NOL, Tax Court, Tax Deductible Expenses, Tax Records

While many individual taxpayers claim to be traders in securities
as compared to investors, in Henricus C. van der Lee, et ux. v. Commissioner TC Memo 2011-234 we learn in my humble opinion that the facts and circumstances of each and every specific taxpayer’s operation must be reviewed to make a proper determination in these regards. The bottom line is though as best I can tell if you want to be considered a ‘trader of securities’ you must at the very least be able to:

1. show that your activity is for the purposes of profiting from market fluctuation rather than appreciation in underlying investment securities

2. have frequent and regular transactions and

3. elect to use the mark-to-market method of accounting under §475(f).

In Henricus the taxpayer tried to avoid the capital loss treatment of stock transactions due to the $3,000 ceiling on capital losses under §1211(b) as investors in securities cannot treat their losses on the sale of securities in any other way. As an aside ‘Dealers’ in securities are exempt from these rules due to the nature of their business as ‘Securities’ are treated like inventory. ‘Traders’ or those who buy and sell stock on a regular basis to profit from the short-term market fluctuations, are subject to the $3,000 capital loss limit unless they elect to use the mark-to-market method of accounting under §475(f).

Regardless of whether the mark-to-market election is made, traders are allowed to deduct their investment expenses as business expenses on Schedule C under §212. However the ‘trader’ has the burden of proof that these expenditures are ordinary and necessary in the production or collection of income.

In the case of Mr. Van Der Lee the main area of dispute was his trading activity. The IRS reclassified his loss on stock trades as capital losses and disallowed the claimed business expenses because the filed tax return did not have a mark-to-market election under §475(f) attached. The Tax Court considered Mr. Van Der Lee’s intent, nature of derived income, as well as frequency, extent and regularity of the securities transactions. In 2002 148 trades were processed. Of these 35 were sales of shares acquired before 2002. Also not a single security was bought and sold on the same day, a purported norm of the ‘trading’ community. As such it was determined that the potential for profit in these sales was based on the general expectation of market appreciation rather than market fluctuation.

The Tax Court agreed with the IRS that Mr. van der Lee was not a trader, but rather an investor in securities in 2002. The loss of $1,388,327 reclassified by the Service as a capital loss was appropriate and as such only $3,000 per year is available to offset ordinary income under §1211(b).

To add insult to injury the legal, travel and meal expenses were not substantiated sufficiently with no specific business purpose stated and as such were disallowed. Additionally the home office expenses claimed were disallowed under §280A because investing in securities is not a trade or business. The net result of the Court’s findings was a complete dis-allowance of all expenses. What a kick in the jimmie.

No comments , , , , , , , ,

US v. Home Concrete Reinforces IRS’ Limited Audit Authority

November 25, 2012 Basis, Tax Court

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.

No comments ,

Tax Court Rejects Conclusions of Cost Segregation Study – Amerisouth Vs. Commissioner

September 11, 2012 Cost Segregation, Tax Court

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.

No comments ,

First-Time Home Buyer Credit – Nievinski v. Commissioner

June 5, 2012 Tax Court, Tax Credit, Tax Guidance & Preparation, Tax Problems & Requests

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.

No comments ,

Is Your Activity For Profit Allowing for Business Deductions – Rundlett v. Commissioner

June 2, 2012 Business Expense, Deductible Expense, Disallowed Expenses, Hobby, IRS Examination, Rental Real Estate, Tax Abuse, Tax Court, Tax Guidance & Preparation

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.

No comments , , ,
« Older Entries